Return on investment vs cost: how to weigh them when making business purchases
Making a significant purchase for your business is a pivotal decision, especially when funds are tight in the early days. To pinpoint the right time for such investments, understanding the potential Return on Investment (ROI) is essential. This involves calculating whether the financial benefits outweigh the costs, including indirect expenses like training.
The ROI formula is straightforward: ROI = (Net Profit / Cost of Investment) x 100. A positive ROI suggests a profitable investment, while a negative one indicates a potential loss. Here's how to evaluate your ROI to ensure wise spending choices.
Understanding ROI with Practical Examples
Imagine you run an environmental surveying firm. You’re approached by a client offering $2500 for a project in rugged terrain, a job that would demand extensive manpower. Purchasing a drone for $1000 could streamline this task, saving hours and reducing physical strain. Additionally, each employee would need $200 worth of training to optimise drone usage.
Calculating Potential ROI
To determine if the drone purchase makes financial sense, calculate your total expenses and potential revenue:
Expected Revenue: $2,500
Total Expenses: $1,000 (drone) + $600 (training for three employees) = $1,600
Subtracting expenses from revenue gives your net profit:
Net Profit: $2,500 - $1,600 = $900
Finally, calculate the ROI:
ROI: ($900 / $1,600) x 100 = 56.25%
A 56.25% ROI indicates a worthwhile investment, and the ability to offer aerial surveying could further enhance your business's future prospects.
When Investments Don't Pan Out
Suppose the drone remains unused due to a steep learning curve. Without utilising the new asset, your client may retract their offer, or the project might require excessive manual hours, rendering it financially unviable. This scenario results in a negative ROI, leaving you with a $1,600 loss.
Final Thoughts
While investing in business assets can be daunting, thorough research and accurate calculations can lead to substantial rewards. Consulting with our team of Wellington accountants at Affinity Accounting can provide invaluable insights into these decisions, ensuring your investments propel your business forward.
Our accountants are equipped to offer expert guidance on financial decisions, helping you navigate the complexities of ROI calculations. Our expertise can support you in making informed decisions that align with your business objectives. For tailored advice and to better understand how your purchases can elevate your business, connect with Affinity Accounting’s Wellington accountants today.
Contact us for advice specific to your situation.
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