Learn Return on Investment Before Starting Business
Synopsis:
What is Return on Investment (ROI)?
Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost.
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
What is Net Income?
Net income, also known as the bottom line, is a crucial metric for any business as it represents the amount of profit generated after deducting all expenses and taxes. Several factors determine the net income of a business, making it a complex and dynamic concept. Firstly, revenue plays a significant role in determining net income. Higher sales or increased customer demand directly impact the top line.
However, it is equally important to consider the cost of goods sold (COGS), which includes raw materials, labour, and production expenses. By managing COGS efficiently, businesses can maximize their profit margins.
Additionally, operating expenses such as rent, utilities, salaries, and marketing costs also impact net income. Reducing these expenses or finding ways to optimize them can significantly boost profitability.
Moreover, taxes, both at the federal and state levels, must also be accounted for. Strategies such as tax planning and taking advantage of available deductions can help minimize the impact of taxes on net income.
Finally, unforeseen factors like market conditions, competition, and economic trends can influence the bottom line. In conclusion, the net income of a business is a culmination of various factors, and understanding and effectively managing these elements are vital for long-term success.
How Each Factors Affects Net Income
- Higher investment
- Moderate investment
- Less investment
Example for ROI on Cost of Investment – Paper Bag Making Business
| Description | Higher Investment | Less Investment | Unit | |||
|---|---|---|---|---|---|---|
| with 100% sales | with 50% sales | with 25% sales | with 100% sales | with 50% sales | ||
| Cost of Investment | 7000000 | 7000000 | 7000000 | 300000 | 2500000 | Inr |
| Production capacity per month | 2500000 | 2500000 | 2500000 | 50000 | 50000 | product |
| If product price is | 5 | 5 | 5 | 5 | 5 | Inr |
| Revenue per month | 12500000 | 6250000 | 3125000 | 250000 | 125000 | Inr |
| Cost of goods per month 60% | 7500000 | 3750000 | 1875000 | 150000 | 75000 | Inr |
| Production expenses per month 2% | 250000 | 625000 | 625000 | 50000 | 31250 | Inr |
| Marketing expenses 10% | 1250000 | 1250000 | 1250000 | 15000 | 15625 | Inr |
| Operating expenses 2% | 250000 | 625000 | 625000 | 12500 | 12500 | Inr |
| Total cost for manufacturing | 9250000 | 6250000 | 4375000 | 227500 | 134375 | Inr |
| Net income | 3250000 | 0 | -1250000 | 22500 | -9375 | Inr |
| Ruturn on Investment % | 46.43 | 0 | -17.86 | 7.5 | -0.38 | % |
| Description | Moderate Investment | Unit | ||
|---|---|---|---|---|
| with 100% sales | with 50% sales | with 25% sales | ||
| Cost of Investment | 1500000 | 1500000 | 1500000 | Inr |
| Production capacity per month | 375000 | 375000 | 375000 | product |
| If product price is | 5 | 5 | 5 | Inr |
| Revenue per month | 1875000 | 937500 | 468750 | Inr |
| Cost of goods per month 60% | 1125000 | 562500 | 281250 | Inr |
| Production expenses per month 2% | 131250 | 84375 | 56250 | Inr |
| Marketing expenses 10% | 37500 | 37500 | 37500 | Inr |
| Operating expenses 2% | 93750 | 84375 | 56250 | Inr |
| Total cost for manufacturing | 1387500 | 768750 | 431250 | Inr |
| Net income | 487500 | 168750 | 37500 | Inr |
| Ruturn on Investment % | 32.5 | 11.25 | 2.5 | % |
Caution
If someone says Higher investment can reduce your production cost, and you can sell products at low price even with good profit. Question and do analysis with above all factors.
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