Return on Investment – What is yours?

A key benchmark for your business is your return on investment (ROI).

This tells you whether or not all the effort put into the business is returning an appropriate level on the equity you have invested.

Most financial experts will tell you that your ROI is the most important measure of all, a statement that I endorse. Why? The answer is simple – your ROI shows whether your business is worth all the effort you put into it.

You want to ensure you are getting a good return on all of the time and money you have invested in your business. If not, you may as well be working for someone else on a wage and save yourself the trouble.

Now, of course, as an ambitious business owner I know you don’t even want to consider that, but it’s important you get rewarded for your blood, sweat and tears.

So what is a good return?

Unfortunately, I cannot give you the exact dollar figure or even percentage because the reality is, your business is different from that of your competitor down the road. What I can give you, though, is a way to work out if you’re achieving a good return. You simply need to work out whether your operating profit is greater than the cost of capital.

How do you do that?

The DuPont Analysis

The DuPont analysis is a performance measurement that was created back in the 1920s and has stood the test of time as a simple but powerful way to determine the financial performance of your business.

It is the way for you to convert your profit and loss statement and balance sheet into a meaningful analysis of your ROI by demonstrating the return you are generating on your assets and equity. You can then determine what drives that return, and whether you are earning the return you want.

For a free copy of my DuPont Analysis template, go to www.adpartners.com.au/dupont.

It is very simple to use. You just need to enter the following information:

  • Gross revenue
  • Variable expenses
  • Fixed expenses
  • Interest expense
  • Other income
  • Total assets
  • Total liabilities.

The excel worksheet will then calculate your various ratios and confirm your ROI.

Once you perform the analysis on your current numbers, you can then change some numbers around to see what the impact would be if you were to make some amendments to your business. For instance:

  • What if you increased revenue by two per cent while keeping costs at the same level?
  • What if you reduced expenses by five per cent while maintaining revenue at the same level?
  • What if you reduced interest expense by three per cent?
  • What if you reduced or increased assets by five per cent?

You will see the impact these changes have on your profit margin, your asset turnover and ultimately your return on assets.

Now you’re starting to really see where your business is financially and what you need to do to get you to where you want to be.

Once again, don’t forget to download your free copt of the DuPont Analysis at www.adpartners.com.au/dupont.

If you need any assistance, do not hesitate to contact us.

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Tony Dimitriadis
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