Tracking Startup Dollars: R.eturn O.n I.nvestment= ROI

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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 PozzoFounder 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.  

 

Putting to Proper Use 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 the customers and not enough product or service, 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 investment from a purely financial perspective, then we would have been much more cautious in our spend 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.  So, now that $10 of investment might return $50 or $60 in the future, representing a 400-500% return.  Same investment, same metric, but just a longer time horizon to calculate the return. "