It's a human nature that if he devotes/(invest) his resources he looks for an healthy outcome (Return) i.e., he wants return on what he had invested. In short it is ROI. (RETURN ON INVESTMENT)
A Businessman looks his healthy ROI as how much Profit he had gained from his deployed resources (Health / Wealth). All businesses give returns that return can either result him profit or loss. A smart & successful investor will always care about security of his investment along with desired results. The percentage of return depends on the type of business you have chosen. High risk gives high returns and the low risk gives low returns.
Taking example of Our Company an ROI greater than 24% is an healthy ROI from both angles. But an exceptionally high ROI (40% etc.) can lead to the fact that there is some gap which is in reverse direction.
ROI can be calculated as follows: (Example of our R.S. /R.D.)
1. ROI = (NET PROFIT /Net INVESTMENT)*100
Net Profit = Gross Profit - Expenditure
2. ROI = No. Of Rotations * Net Profit Margin
No. Of Rotations = Turn Over / Investment
Net Profit Margin = Gross Profit - Expenditure
Gross Profit = %Gross Margin * Turn Over
Investment: Paid up Stock, Credit, Claims
Gross Profit: Gross Profit stands for (Total Turn Over * % Gross Margin)
Expenditure: Expenditure covers each & every money spent in relation with that business. That can be
1. Staff Salary
2. Office Expenses (Tele, Elec., Rent, Insurance, Printing etc.)
3. Distribution Cost
4. Any Discount
5. Miscellaneous
Taking example :
1. A TO Z Agency
Sales and Turnover
1
Concern Sec Sales (year 2005) (Rs.lakh)
2
Gross Margin @ 4.76% (in Rs.lakh)
Investment (in Rs.lakh per month)
1
Stock
2
Credit
3
Avg Claims
Total
Total Investment (in weeks)
4
CET (in days)
Net Investment (in weeks)
Net Investment (in Rs.lakh/month)
No. of Rotations
Cost Elements (in Rs. per month)
1
Salesmen - Salary + TA/DA + misc
2
Other Staff Cost
a
Godown keeper
b
Computer operator
c
Any other staff
Total
3
Distribution cost
a
Cost of Diesel
b
Cost of Oil
c
Vehicle Maintenance
d
Vehicle Driver - Salary + TA/DA
e
Delivery Boy - Salary
f
Cost per dispatch
g
Any other delivery costs
Total
4
Office Expenditure
a
Telephone and Fax
b
Electricity
c
Printing and Stationery
d
Rent and Insurance
e
Miscellaneous
Total
5
Discount to Trade
Total operating Costs (Annualised)
Net Margin (in Rs.lakhs)
Net Margin %
Return on Investment
ROI of A TO Z Agency comes out 28.6% which is an healthy ROI.
REGARDS
NARESH SINGH
LUXOR PARKER