"Maximize Startup Success: Master ROI (Return on Investment) for Financial Growth"
Updated: 6/5/2024
Featured Contributors:
Samuel Stokes, an Accountant and Business Strategist for the last 15 years, who has worked with thousands of business owners to build and scale their business. Presently serving as Director of Master Your Business
Heidi Pozzo, Founder of Pozzo Consulting. Previously CFO of Longview Fibre Paper and Packaging where her work resulted in recognition as CFO of the Year - Large Company. Author of, Leading the High-Performing Company, recently released.
Adam Sherwin Founder of Viakix an outdoor footwear company. That has been in business since May 2016 and rapidly growing ever since.
Understanding and maximizing your Return on Investment (ROI) isn't just an advantage—it's a necessity. For entrepreneurs steering a fledgling startup towards profitability, knowing where every dollar goes and how much it brings back is crucial. ROI is more than a buzzword; it's the most straightforward metric to gauge the effectiveness of your investment decisions. Whether it’s through marketing campaigns, new software tools, or hiring decisions, calculating your ROI helps you understand which investments are paying off and which are not.
What is ROI?
Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment. It measures the return you get on a dollar invested in a specific area of your business, relative to its cost. Essentially, it tells you whether the money you're putting into your business is making more money in return.
Why is ROI Important?
Financial Insight: ROI helps you understand which investments are working and which are not, allowing you to allocate resources more effectively.
Strategic Planning: By knowing your ROI, you can plan future investments more wisely, focusing on areas that offer the best returns.
Performance Measurement: It provides a clear indicator of how well your business strategies are performing relative to their costs.
Tips to Keep It Simple
Start Small: Focus on measuring ROI for one or two simple projects first, like a marketing campaign or a new tool.
Use Tools: There are many online calculators and software that can help you compute ROI simply by entering the numbers.
Keep Regular Tabs: Regularly check the ROI of ongoing investments to see if they’re still worth the cost. This helps in avoiding unnecessary spending.
Proper Use of Startup Dollars
Samuel Stokes:
"I have often found that Entrepreneurs waste vital cash flow that could be better put to use growing their business. Every entrepreneur knows that they need to grow their business in order to succeed but unfortunately, they are missing a few essential tools to make sure those funds are being spent effectively.
Most entrepreneurs are so driven to grow their business, that they don't stop to ensure that the money being spent is actually generating a return. Often this is because they are not quite sure how to work it out. One common business owners make is to compensate for this lack of knowledge by throwing more money at it.
The problem is if the money being spent isn't generating a profit the business will begin leaking cash.
The solution is easier than you would think. It all comes down to working out your Return On Investment or ROI. It is one of the most valuable tools for decision-making you have at your disposal. "
R.O.I. When seeking Short-term Results
Heidi Pozzo:
"In terms of ROI, my preferred measure is payback. That means how many dollars, net of direct cost, do you get (aka margin) for each dollar spent.
Owners should ask themselves how the money will result in increased business. Many times people will spend a lot of money on marketing and especially social media advertising to no avail.
If the owner is looking to increase sales:
The question is how can I best reach my qualified customers?
If you have customers and not enough products or services, then the question is how can I expand my production or service capabilities while remaining cash neutral?
The best thing an owner can do is list all of the potential options to grow the business and how fast (in months) the investment will pay back. Then, rank those in order of the fastest payback.
To measure new activities as you have listed, you want to do a few things:
First is determine how many people contact the business based on the ad/event/etc.
Then track how many take the next step to buy.
Track how many actually buy.
The return would be the margin you get off the new business vs. how much was spent to get that business. You would typically expect new product launches and events to have higher returns if you have put them together well, than general advertising. "
R.O.I. When seeking Long-term Results
Adam Sherwin:
" I've always focused on ROI, but more from a long-term strategic perspective than from a financial metric. As a startup, the "R" portion of ROI is often not realized for several years from the initial investment.
Early on, we had to make substantial investments in new equipment, machine molds, trademarks, patents, and even web design. We did so with the knowledge that we would not have a return for years to come. Had I thought about these investments from a purely financial perspective, then we would have been much more cautious in our spending and our growth would have suffered. Our philosophy has always been -- plan for success.
When thinking about ROI, another area where a long-term view is needed is around custom acquisition.
For example, if it costs me $10 to acquire a new customer and I make $10 on a unit sold, then my ROI is 0%. However, this metric does not account for the long-term value of a customer. We feel confident that once the customer wears our footwear, they will be a lifetime customer.
In addition, they will tell a friend or two about us ...Referrals! So, now that $10 of investment might return $50 or $60 in the future, representing a 400-500% return. Same investment, the same metric, but just a longer time horizon to calculate the return. "
Tips for Managing ROI
Set Clear Goals: Before making any investment, know what you expect to gain from it. This could be more customers, higher sales, or better brand recognition.
Track Everything: Use tools to track how your investments are performing. This can be as simple as using a spreadsheet or as sophisticated as using specialized business analytics tools.
Review Regularly: Look at your ROI regularly to see if your investments are still paying off. Markets and business environments change, and so should your strategies.
Don’t Just Focus on Money: Sometimes, the benefits of an investment aren’t directly monetary. For example, investing in customer service might not immediately increase revenue, but it can improve customer satisfaction and retention, which is valuable in the long run.
By understanding where each dollar is going and how much it’s bringing back, you can make informed decisions that propel your business forward. Remember, a robust ROI strategy isn’t just about tracking numbers—it’s about making those numbers work for you. As you continue to refine your investment strategies, keep innovation and adaptability at the forefront of your planning. With these practices, you're not just surviving the startup phase—you're setting the stage for sustained success.
