Affectionately known as ROI, return on investment is one measure of the financial reward a company receives by investing in any asset. The asset could be as large as another business or as small as a fuel tank.
In this month’s column, we want to challenge you to think about return on investment for every dollar you spend in your business. Return on investment is calculated by dividing the average annual profit generated from the acquired asset by the cost of the asset. The result is expressed as a percentage. For instance, if you invested $100,000 in an asset that provided $25,000 profit per year, the return would be 25%.
If you are a long-time reader of MFA, you already know that for projects with profits occurring over more than one year, the return on investment is not as accurate as discounted cash flow rate of return. (Discounted cash flow takes into account that money received in later years has less than face value due to opportunity cost. Refer to the October 1997 issue of MFA for details on discounted cash flow.)
The purpose of this month’s column, however, is not to compute returns, but to get you thinking in terms of return on investment for each and every dollar you spend using typical projects.
Company Acquisition – When buying out another marketer’s business, ROI is calculated by dividing the first year’s net profit after tax by the purchase price.
New Site – Divide the net profit after tax for the site by the total cost of the site. (Site Planner software will automatically do this calculation for you.
Fuel Equipment at Store Site – When you install tanks, pumps, canopies, etc. at a dealer location, you should check your ROI. In this case, your profit will be your contractual or estimated first year fuel margin net of delivery costs divided by your net investment in site equipment after any supplier rebates.
Loaned Equipment Placed at Customer Location – Divide the estimated annual margin after delivery and service costs by the market value of the equipment. (Note: Equipment Tracker users should select the Accessories menu item, then select Return on Investment for automatic calculation.)
Salesperson – Using ROI on sales personnel is an interesting way to determine which salespeople give you the best return on your payroll investment. Take the annual gross margin developed by each person less delivery costs for those accounts divided by the total of the person’s salary, benefits and other direct costs. You can then rank your salespeople based upon the return they are generating in relationship to their cost!
Office Equipment and Trucks – This gets a little trickier since you need to determine the economic benefit to the new equipment. With a new truck, this may come in terms of productivity and/or hard dollar costs as well as new margin potential .
These are just a few examples to get you thinking about ROI. Challenge yourself to determine ROI for every dollar you spend in your business. With multiple projects, use the returns to prioritize your expenditures. With multi-year projects, however, remember you’ll get the most accurate results using discounted cash flow analysis, even though this method may take a little longer.