Depending on what type of return you’re seeking on an investment you make in your business, there are different ways to improve your ROI. Returns can include increased profits, reduced expenses or intangible benefits such as improved operating efficiencies or increased brand awareness. Clearly defining your goals and setting as many quantifiable benchmarks as possible will help you increase the payback on the different initiatives you take to improve your company.
The first step in improving your return on an investment is to clearly define the potential return or returns you might get from your investment. These can include higher sales, increased revenues, bigger profits, reduced overhead or production costs, higher employee retention, better customer satisfaction, increased brand preference or fewer government regulations. If possible, set multiple benchmarks for your return goals. For example, instead of setting increased sales as a goal, set increased sales during a specific month, in a particular territory, using a specific sales rep or from a particular distribution channel as a goal.
Calculate Your Current Return
To improve the returns on your investments to the point that they warrant your not pursuing other opportunities with that cash or effort, you must know the return you’re currently getting selling a product, using a particular piece of machinery, retaining a specific employee or continuing to do whatever else you are measuring. For example, you might produce 1,000 units of your product per day using your current workforce, with a labor cost $2 per unit. If you are considering adding training or hiring more workers, you now have a benchmark against which to measure any changes you make in an attempt to improve your return.
One way to increase your return on investments is to generate more sales and revenues or raise your prices. If you can increase sales and revenues without increasing your costs, or only increase your costs enough to still provide a net gain in profits, you’ve improved your return. If you can raise your prices without decreasing your sales enough to erode profits, you’ve improved your return. Using your calculation of your current return, look at ways to improve your sales and revenues in ways that provide you with a greater profit than your current business practices.
Another way to improve your return is to reduce your expenses. You won’t have to increase your sales or raise your prices to improve the return on your investment this way. Divide your expenses into overhead and production costs to help you better find expense-reduction opportunities. Overhead costs are non-production expenses such as rent, insurance and phones. Production costs are the expenses you incur to make one unit of your product, such as materials and labor.
Re-Evaluate Your Expectations
Every investment you make doesn’t have to provide a dollar benefit; however, your investments should provide some identifiable benefit. For example, if you throw a thank-you party for clients at the end of the year, that won’t increase your sales, but it might increase customer loyalty, helping you retain them. Giving $10,000 worth of benefits to your employees will drain that cash from your bank account, but it might make it easier to recruit better workers, improve morale, increase productivity and help you keep valuable staff members. If you run a marketing campaign, in addition to sales increases, track the new customers you gained, increased traffic to your website and increased awareness of your business in the marketplace. Re-evaluating your expectations can help you spot intangible benefits to pursue that will eventually help increase your profits.
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