Return on Investment or ROI is a percentage used to compare investment options or evaluate business plans. The formula is ROI = (Net Profit / Cost of Investment) x 100.
So, if you wanted to buy a business for R1 million and expected profits are R300 000, the ROI would be 30%. Among SMEs, the term ROI is widely used as an estimate of the likely return on the investment of non-financial as well as financial resources.
For instance, an entrepreneur could ask, “What return will I get from a new business campaign compared to potential losses from existing customers who feel ignored?” Typical investments are management time, floor space, quality upgrades, delivery capacity or scarce skills, and these are difficult to quantify in financial terms.
The return is not necessarily in cash either; market share, increased competitiveness, brand awareness and gaining first mover advantage are just some of the returns that may be hard to express in accounting terms.
But if it’s all so difficult, why should you bother with ROI? Without a ROI estimate, you don’t know if you’re making best use of your people, time, machinery and know-how. Could you use all these to more effect on another opportunity? Opportunity cost is the return you would have made if you did something different, and you can only assess which would be better by having some form of ROI.
The right measurements
Few SMEs will have the resources to do exact costing on indirect costs and returns, so it pays to develop a few rules of thumb to put values to things like management time, customer satisfaction, staff motivation and other intangibles so you can do a rough ROI calculation.
Sales and marketing initiatives are typical uses of ROI. You may want to expand your sales force or develop a branch structure, but should you rather move to online sales or build a reseller channel? You probably need to approve marketing campaigns to build your brand or gain incoming sales leads, and it’s tough to choose the right ones.
Related: How To Prove Your Marketing ROI
You have limited funds to spend on sales and marketing, so it’s wise to ask if you’re getting the best ROI for each sales team, channel and marketing promotion. A ROI calculation helps to evaluate existing marketing initiatives or sales models, and choose the right new ones.
The same applies to products and product ranges. Which are giving you the best ROI when considering issues like technical support and inventories needed? We all have ‘old favourite’ products that have served us well, but should we still be selling them? ROI could tell you.
Cost of products
Whether you manufacture or buy goods to sell, it’s all too easy to keep things as they are. With rapidly rising costs and a very fast-changing environment, that is not always a smart idea.
Questions you should be asking yourself include: What will give me the lowest overall cost of product, considering quality, reliability, speed of delivery and payment terms; which supplier gives me the most opportunity to maximise sales and what is the cost of being let down by a supplier?
Then examine alternative ways to get your products or raw materials. Long-term buying contracts, outsourcing manufacturing or sharing machinery and delivery vehicles may give you a much better return on investment. Many informal businesses form buying co-operatives to reduce their cost of sale.
ROI is a useful tool to assist decision-making. ROI in the informal sense, with some rules of thumb to make you think about the intangible costs and benefits means you can rely on reasonable information rather than having to fly blind. Thinking about return in the broader sense is a great way to make better decisions and build your business.
Many SMEs Start With Great Plans But Fail To Take The Big Leap
Most small-to-medium sized enterprises (SMEs) are aware of the benefits of good governance practice but, faced with limited time and resources, which could be costly in supporting growth ambitions.
- 27% of SMEs don’t have a vision that covers more than the next 12 months
- 45% of SMEs either don’t have a strategy, or one which covers only the next 12 months or less.
The latest global research, inclusive of Africa in supporting small business growth from ACCA, outlines the governance needs of SMEs. It highlights simple but effective practice over vision, strategy and human capital can provide them with greater flexibility, adaptability and resilience as they grow. This a huge factor in the long-term sustainability of the business, if put in practise.
“If you incorporate good practice for running your business from an early stage, your company is more likely to be resilient and is more likely to appeal to external investment,” explains Jo Iwasaki, head of corporate governance at ACCA. It is about leadership directing the company and being aware of factors both within and beyond their enterprise and build resilient organisations in the face pf the changing world.
The research also found that half (49%) of SMEs do not involve anyone external in their strategy discussions, despite the benefits experienced by those that do, which include additional experience and knowledge of the industry/sector (according to 46%), an independent perspective / constructive criticism (44%) and advice on their growth strategy (39%).
“There are a lot of daily concerns for the leaders of a small business, and often the biggest challenge is meeting day-to-day operations and cash management needs while thinking about the long-term future of the company. And while many leaders are keenly aware of the importance of resilience in the rapidly changing business environment and of buy-in from stakeholders, for example funders and employees, there often may not be the time to think or do much about it,” added Iwasaki.
“I hope that this research helps SMEs in focusing on some of the most crucial issues, and can be a resource not just to SMEs themselves but also to policymakers,” concluded Iwasaki.
How vision and strategy helps small business succeed is available at ACCA Global.
Small Business Owner? All The Documents You Need To Get A Car
Read on below for some tips on all the documents you need to get a car as a small business owner.
As a small business owner, transport is an important aspect of your financial success. You need to be able to drive to and from meetings so that you arrive on time, as well as have the ability to transport your products to customers and to your store.
You will need to purchase a car for your small business to make life easier and more efficient. Once you have used a car repayments calculator in South Africa, you will need to gather all the necessary documents together in order to make a purchase. Not sure what those documents are? Read on below for some tips on all the documents you need to get a car as a small business owner.
A business plan
A business plan is necessary for the financial institution as it will show them how your business is doing financially and whether or not you will be able to repay them on time and in full. Your business plan should be detailed and provide a financial breakdown of your business at its current point in time.
Having a business plan will also show the financial institution that you are serious about your commitment to repaying your car loan. Being transparent with them will work in your favour and allow them to see the progression of your business with the use of your new vehicle. You will need to carefully outline how you will repay the car and what you will do if you are unable to make the repayments.
One of the most important documents you will need to provide the lender with is proof that you are the owner or part-owner of the business. You will need to turn in the correct documents that correlate to your business, such as a partnership agreement, limited liability company documents or a business licence.
In some cases, you can simply provide your lender with your personal information and the information of your business. You will need to provide the tax identification number of your business too. The ownership documents are important, as they differentiate the purchase from being a personal one to being one for a business.
Be sure to have these documents ready, and make copies in case you should misplace anything.
You will need to provide the lender will all the necessary personal information. This includes a copy of your identity document, the most recent three month’s worth of bank statements for your business as proof of your ability to repay the debt, as well as proof of business and residential address.
If you are the sole proprietor, the financial institution or lender will need these documents because you and your business are seen as one in the same. This means that they need to look at the income from your business and both your business and personal expenses when calculating your affordability. You can use a car repayments calculator in South Africa to do the legwork and figure out your affordability before the financial institution does but their results might differ.
Driver’s licence of the regular driver
If you are going to be driving the car regularly, then you will need to provide the financial institution or lender with a copy of your driver’s licence. However, if you will be allowing your staff to use the company car, then you will need to provide both a copy of your licence and theirs, in order to add them to the insurance as a regular driver.
Providing a copy of the driver’s licence of everyone who will be driving the company car will allow your insurance company to add them as regular drivers. It is also important for your financial institution to know how and how often the car will be used, as this will influence their approval decision. Be sure that whoever you list as a regular driver is trustworthy and will drive responsibly in order to limit the amount of wear and tear on your business vehicle.
Proof of insurance
Once you have settled on the perfect car for your needs, before the car can be delivered you will need to provide the lender with proof of insurance. This is necessary as the financial institution or lender needs to be assured that the car will be insured against anything that might happen to it while en route to your business.
You should look for car insurance that offers affordable premiums and that is tailored to company cars rather than cars for personal use. The proof of insurance should have the details of all regular drivers listed, so that your lender has a comprehensive list of everyone who will be using the car, and should clearly state what is and is not covered. Be sure to make a few copies of this document for the drivers to keep for themselves in case they have any queries or need to make a claim at some point.
How To Choose An Outsourcing Partner For Your Small Business
Before you jump the gun and choose the first outsourcing company that piques your interest, you need to consider the following factors.
Business process outsourcing (BPO) has proven to be a practical decision for many business owners when it comes servicing your customers’ needs. Gone are the days where you’re needed to juggle customer communication while trying to solve several pressing issues at the same time. Now, you can simply put those concerns in the hands of professionals who can help you achieve greater success.
Many small business owners are forced to wear several hats at the same time. And focusing on your business’ direct needs, such as growing your bottom line, as well as having to manoeuvre your way through the online space to keep your customers happy, is not always possible. Not to mention, there isn’t always enough time in the day to focus on, and excel in, all of these important elements.
Based on the above, it’s clear that outsourcing your needs is a feasible solution for long-term success, however, the question is not always “why” but rather “who” to outsource to. With so many incredible outsourcing partners out there, it’s important that you find a company which can service the needs of your customers and add value to your unique business offerings.
Before you jump the gun and choose the first outsourcing company that piques your interest, you need to consider the following factors.
Analyse the resource quality
When you choose to outsource your services to a company, you need to look at their skills to determine whether or not they will be able to help you achieve the success you want and need. Make sure that you do your research to see the type of clients they work with or the projects they’ve worked on to ensure they’re able to handle the volume of questions, queries and customer needs your business has.
Choose according to the infrastructure you need
As a small business, most of the frustration of not being able to meet your customers’ needs is due to the lack of necessary infrastructure needed to perform particular tasks. For instance, artificial intelligence (AI), chatbot technology and more. Your chosen provider will also need to have the correct equipment and software to safeguard your information if the server is down or one of their machines become faulty. Customer service in today’s day and age is a constant service.
Your provider needs to be able to set up solutions to ensure that your customers will be assisted 24-hours a day.
Communication needs to meet your business needs
The company you choose to work with should have a clear understanding of your business needs, and they will need to be available for communication when you need it. Small businesses are testing the waters, and therefore should be able to change their approach in real-time if something isn’t working. If your partner is on-par with what you need for your business, together you will be able to succeed.
Flexibility in service offerings
As mentioned, your chosen partner needs to be flexible in their services in order to keep up with your customers’ ever-changing needs. Should your approach need to change, your outsourcing company should be able to guide you and provide insight that can help you achieve your goals. Reliability also goes hand-in-hand with flexibility, as your partner needs to work effectively to help your business thrive online.
Outsourcing cost versus delivery
Small business owners need to be careful not to over capitalise on their expenses, therefore it is advised that you shop around to find the most affordable, competitive price for your needs. Do your research on the market to see what other companies are offering in terms of costing and services. During this process, you need to ensure that you are not choosing the cheapest place and compromising on quality.
Weigh up your options and remember that this is a service that you are unable to provide due to time and skills.
With the right partner, the benefits of outsourcing are endless. They will have a positive impact on your reputation and your bottom line, which is why you cannot take this decision lightly. You will also need to choose according to the size of your business and your needs. For example, if your needs are to communicate with your customers across various online channels in a personalised manner, you will need to look for a company that is small enough to attend to the detail you expect. If you simply want to automate your customer needs, you will be able to consult with large companies with years of experience and the latest technology. The smaller your company choice, however, the smaller your financial risk.
In the beginning stages, it’s best to start with something small and work your way up according to your business growth and needs. The above-mentioned factors are crucial when wanting to boost profits and return on investment (ROI). Choose wisely and, together, you will take your business to new heights.
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