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Learn return on investment before starting business
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:
Example for ROI on Cost of Investment – Paper bag making business
| Higher Investment with 100% sales | Higher Investment with 50% sales | Higher Investment with 25% sales | ||||||||
| Cost of Investment | 7000000 | Inr | Cost of Investment | 7000000 | Inr | Cost of Investment | 7000000 | Inr | ||
| Production capacity per month | 2500000 | product | Production capacity per month | 2500000 | product | Production capacity per month | 2500000 | product | ||
| If product price is | 5 | Inr | If product price is | 5 | Inr | If product price is | 5 | Inr | ||
| Revenue per month | 12500000 | Inr | Revenue per month | 6250000 | Inr | Revenue per month | 3125000 | Inr | ||
| Cost of goods per month 60% | 7500000 | Inr | Cost of goods per month 60% | 3750000 | Inr | Cost of goods per month 60% | 1875000 | Inr | ||
| Production expenses per month 2% | 250000 | Inr | Production expenses per month 10% | 625000 | Inr | Production expenses per month 20% | 625000 | Inr | ||
| Marketing expenses 10% | 1250000 | Inr | Marketing expenses 20% | 1250000 | Inr | Marketing expenses 40% | 1250000 | Inr | ||
| Operating expenses 2% | 250000 | Inr | Operating expenses 10% | 625000 | Inr | Operating expenses 20% | 625000 | Inr | ||
| Total cost for manufacturing | 9250000 | Inr | Total cost for manufacturing | 6250000 | Inr | Total cost for manufacturing | 4375000 | Inr | ||
| Net income | 3250000 | Inr | Net income | 0 | Inr | Net income | -1250000 | Inr | ||
| Ruturn on Investment % | 46.43 | % | Ruturn on Investment % | 0.00 | % | Ruturn on Investment % | -17.86 | % | ||
| Moderate Investment with 100% sales | Moderate Investment with 50% sales | Moderate Investment with 25% sales | ||||||||
| Cost of Investment | 1500000 | Inr | Cost of Investment | 1500000 | Inr | Cost of Investment | 1500000 | Inr | ||
| Production capacity per month | 375000 | product | Production capacity per month | 375000 | product | Production capacity per month | 375000 | product | ||
| If product price is | 5 | Inr | If product price is | 5 | Inr | If product price is | 5 | Inr | ||
| Revenue per month | 1875000 | Inr | Revenue per month | 937500 | Inr | Revenue per month | 468750 | Inr | ||
| Cost of goods per month 60% | 1125000 | Inr | Cost of goods per month 60% | 562500 | Inr | Cost of goods per month 60% | 281250 | Inr | ||
| Production expenses per month 7% | 131250 | Inr | Production expenses per month 9% | 84375 | Inr | Production expenses per month 12% | 56250 | Inr | ||
| Marketing expenses 2% | 37500 | Inr | Marketing expenses 4% | 37500 | Inr | Marketing expenses 8% | 37500 | Inr | ||
| Operating expenses 5% | 93750 | Inr | Operating expenses 9% | 84375 | Inr | Operating expenses 12% | 56250 | Inr | ||
| Total cost for manufacturing | 1387500 | Inr | Total cost for manufacturing | 768750 | Inr | Total cost for manufacturing | 431250 | Inr | ||
| Net income | 487500 | Inr | Net income | 168750 | Inr | Net income | 37500 | Inr | ||
| Ruturn on Investment % | 32.50 | % | Ruturn on Investment % | 11.25 | % | Ruturn on Investment % | 2.50 | % | ||
| Less Investment with 100% sales | Less Investment with 50% sales | |||||
| Cost of Investment | 300000 | Inr | Cost of Investment | 2500000 | Inr | |
| Production capacity per month | 50000 | product | Production capacity per month | 50000 | product | |
| If product price is | 5 | Inr | If product price is | 5 | Inr | |
| Revenue per month | 250000 | Inr | Revenue per month | 125000 | Inr | |
| Cost of goods per month 60% | 150000 | Inr | Cost of goods per month 60% | 75000 | Inr | |
| Production expenses per month 20% | 50000 | Inr | Production expenses per month 25% | 31250 | Inr | |
| Marketing expenses 6% | 15000 | Inr | Marketing expenses 12.5% | 15625 | Inr | |
| Operating expenses 5% | 12500 | Inr | Operating expenses 10% | 12500 | Inr | |
| Total cost for manufacturing | 227500 | Inr | Total cost for manufacturing | 134375 | Inr | |
| Net income | 22500 | Inr | Net income | -9375 | Inr | |
| Ruturn on Investment % | 7.50 | % | Ruturn on Investment % | -0.38 | % | |
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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