Money Advice Guide

Ask yourself these questions. When you make any “investment” in your business, do you just “do it because you have to,” or do you figure out what it’s really worth? Do you struggle once in a while choosing between two alternatives? When you hire a new employee, do you calculate what you have to get back? How about when you spend your own time doing something? Can you explain to your customers the specific value of what you sell to them? Does your business “think” in terms of ROI?

If you’re answering any of these (or similar) questions the wrong way, you might be selling yourself short. Keeping your eye on the return on every “investment” you make is critical to the long term success of your business. If that was hard to do, or took you a lot of time, you’d have a good excuse not to bother. But, it’s not hard, you can do it in a few minutes, and it will give you a very different perspective on choices you think about every day.

Let’s take the mystique out of Return On Investment - it’s just not as complicated to calculate as it may seem. Small business owners have to deal with ROI questions a lot more often than they think and the concept doesn’t have to be as difficult as a financial analyst, or a CPA makes it sound. So, let’s define in simple terms what ROI really is.

Investment: The amount of money you have to spend to do something - anything, really, like buying a truck or a building, starting a new product line, hiring another employee, or even deciding whether or not to spend your valuable time on some project. This investment can be cash that you have on hand, or money that you borrow.

Return: The income, or cash stream that you expect to receive over some reasonable, predefined time period, because you made the investment.

ROI: The average interest rate that you will earn over your predefined time period for trading the money you have today for the income you will earn in the future.

A Good Deal: The present value of the income you get in the future exceeds the investment you make today.

When you think about ROI, it’s important to remember that you have to equate the value of the investment you are making today with the value of the cash you will receive in the future. In other words, you have to think about the present value of those future cash flows, because they are not worth as much in the future as they would be if you had them today - if you had them today, you could invest them and earn interest. So, in ROI calculations, the discount rate is the assumed interest rate you have to earn on those future cash flows to equal the investment you are making today.

Think for just a moment about what the discount rate in the ROI calculation really means. Assume that you have $100,000 to invest and that you have three investment alternatives. You can invest the money in government bonds and get a “risk free” return of about 4.5%. If you prefer to invest the $100,000 in the stock market, you’re taking on more risk, so you need a higher return - maybe 8% to 10% to compensate you fairly. Now, what if you want to invest the money in a new product line? If you can get 4% with no risk and 10% by going into the stock market, what return do you need to risk losing all of your $100,000 - maybe 15% to 20%?

ROI represents a very useful thought process that should be applied to a lot of the decisions small businesses have to make. Doing the calculations and knowing the numbers is not nearly as important as just thinking in terms of ROI. Investments are not always those big deals where we actually write a check. Sometimes they are as simple as how people are going to spend their time, or the additional income you might realize from selling more of your product or service. We have choices about what people do, how they spend their time, and what things we are going to emphasize; applying the ROI thought process makes it easier and more efficient to choose between the alternatives that you have. And, if you invest ten more minutes looking quickly at the two examples below, you’ll see that there is an easy way to get a handle on the ROI of virtually anything you do.

Every business has a different tolerance for risk and will make different assumptions about what the investment potential of different choices might be. The point, though, is that we too often don’t think about ROI and quite often don’t look at the actual numbers. Don’t allow your business to be one that doesn’t take the time to look at this appropriately.

If you would like to access an easy to use ROI Model to calculate the return on one of your investments, just sign up for our free trial and be our guest.

Jim Deyo is the President of Business Advisor Online, an internet based service that provides small businesses with the ideas they need to grow and the resources they require to make the right decisions. As a former Sr. Vice President with a major banking institution, Jim worked extensively with small and medium sized companies and has over 30 years experience in commercial and consumer lending, accounting, finance, marketing, and strategic planning. Visit the website at http://www.businessadvisoronline.com and sign up for a six week free trial of the service, or e-mail Jim at jimdeyo@businessadvisoronline.com.

Tags: return on investment, roireturn on investment, roi

Share This

If you saw dollar bills blowing in the parking lot, you’d run out after them.

But every day, business owners and managers let their hard earned money go right out the door and don’t even know it.

It leaves due to lack of attention, lack of focus and lack of long-term thinking. And here’s what you can do to make it stop!

Who are these people?
Whether you spend just hundreds of dollars or thousands on marketing your business, you should simply stop it all together if you don’t take the time to figure out who your customers are. How do you do that?

Why not ask?

As far as I’m concerned, an ad that brings a propect to your business is just as effective as an ad that brings a buying customer to your business. It’s all about foot traffic (or virtual traffic as the case with website commerce.)

However, most folks are so busy in their everyday affairs of running their business that don’t take the time to see it that way.

So tip number one is think of tomorrow and find a way to get contact information of everyone that walks in, calls or emails your business. Maybe its a guest book or a newsletter or simply through conversation, but get it and log it somewhere. We’ll talk about why in a second.

Why did they come in?
Find out what brought them to your business to begin with. More than likely this will involve you or someone from your staff interacting with the customer to find out.

In our office, when the phone rings with a potential customer looking for marketing advice or web site details, I immediately insert “so how did you hear about us?” into the conversation.

Why does it matter? Well because the second tip is to find out what kind of advertising (or “non-advertising”) actually brings folks to your company. What I mean by “non-advertising” is that quite often, folks come in due to a referral or walk-by traffic.

If you have some resources to allow this, try having a few different phone numbers and running them in your television or print ads. If the numbers are not published, then its a good tracking method for those phone calls.

If you’re spending money on advertising - you need to know what works and what doesn’t. The smart way to market is to find out what works and get rid of everything else. Unless, of course, you enjoy losing money!

A list worth its weight in gold.
Now the good thing about creating your customer list and adding to it whenever possible (this is also called a database) is to use it to your advantage. If you have your list and don’t use it, again you’re wasting money and effort.

The third tip is to communicate on a regular basis with that list. Send an email or mail them a letter. Hire an intern to make phone calls and offer special savings for help with a customer survey. Learn from your list and use it to make sales and grow your business. These people konw who you are and what you do - so work that to your advantage!

Communication internally is just as important.
Its amazing how many business owners put so much effort into trying to bring customers to their business but neglect to plan for their arrival.

If you have staff, you want to make sure that any and all tips, specials, information, new products or special order opportunities are clearly communicated as often and clearly as possible. Don’t take that for granted!

If its just you, then make sure you have documentation (flyers, brochures or a website) that can answer questions or peak interest so you can be two places at once.

Do no take your knowledge for granted.
Just because you know things about your product and your business does not mean your staff or your customers do.

You can never share too much information with your staff or your customers when it comes to the benefit of your business.

Find a way to make a customer
The final point is to think of your customers needs before they do and take advantage of that knowledge or skill.

Your customer has options (unless you’re wicked fortunate to be in a non-compete industry!) It’s your job to convince them you are the best choice for their needs. The best part - most of the time they really don’t know their needs.

Its scary for someone to make a commitment or a decision without feeling completely comfortable. So make them comfortable. Offer to give them free advice or a free analysis of their project.

Give them some pointers based on your professional experience.

Perhaps some handouts or sit down meeting.

This can be a free or cheap service. Heck, you may lose money or break even at best. But what it does is give you an insight as to their real needs or, even better, insight as to other ways your business can help them!

Always be willing and prepared to help your customer know more, get more and see more about your business and you’ll stop sending money out your doors!

Tags: customer communication, customer retention, customers, marketing, return on investment, roicustomer communication, customer retention, customers, marketing, return on investment, roi

Share This