Calculating ROI - How do you know if IT was worth it?
Entrepreneurs spend tens of thousands of dollars every year on their businesses. From coaching to marketing to advertising to networking and conferences, web development and copywriting. The list goes on and on and on….and maybe one more on.
As a business coach for women I am mindful of the budget allocations, marketing and ad spends my clients make and how it impacts their cash flow, revenue and profitability.
A question that often is asked of me is, “how will I know if IT was worth the investment.” And while there are a many factors that can be considered, I am always pleased to say there is a quick and dirty ROI calculation.
It’s not magic, it’s simply math.
Brief Case Study
Industry - Manufacturing
Years In Business - 3+
Previous Year Revenue - $170,000 (down 39%)
Date Coaching Began - January 2018
Sales Model - Business to Business
The owner of a boutique textile manufacturer wanted to increase systems, processes, revenue and profit. Her active marketing had become inconsistent and she was seeking a coach who could be a strategic partner as well as a sounding board for her ideas.
She had a structured passive marketing plan and social media strategy involving Facebook and Instagram. Most interaction was from other industry professionals, though not end purchasers. So while she had a brand presence online, she was not getting sales.
She was confident that if she could consistently get in front of the people who would sell her product to their customers they would buy from her and she could also shorten her sales cycle.
Between January - July of 2018 she took a feet on the street approach to marketing (something she had done in the past, though inconsistently) and scheduled face to face meetings with potential clients in different regions of the US.
In July of 2018 at the halfway point of the year we looked at whether she was getting a positive ROI on her coaching investment.
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
The ROI shows you how much your company gained from an investment you made. ROI is a percentage and helps you determine which investments were successful and which weren’t. (The bigger the percentage the more successful the investment. The smaller the percentage the less successful the investment).
ROI compares how much money an investment brought in to how much you paid for it. It shows you whether your investment is profitable or not. A high ROI ratio means you receive more income per investment, which is good.
Let’s say you want to measure the ROI of your recent marketing strategy. You have $9,000 in gain from investing in Google Adwords advertising, and your cost of investment was $5,000: ($9,000 - $5,000) / ($5,000) = 0.8 x 100 = 80%
In this example, you made a good marketing investment since 80% is high. You could compare this to other investments in your small business marketing budget to help you analyze which investment was best and where to spend more money.
Now back to my client:
Following the ROI calculations formula: ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
Here’s what my client discovered about the ROI on coaching.
Data Point #1 - She had as much in sales in the first half of 2018 as she did in all of 2017
Data Point #2 - An $85,000 gain
Data Point #3 - 6 months of coaching fees for her selected package $4000
(Gain from Investment - Cost of Investment) / Cost of Investment = ROI
(85,000 - 4000) / 4000 = 20.25 x 100 = 2025% ROI
Just let that sink in for a second.
And yes for you extra analyticals (my people!) we did go on to further account for travel, time, and accommodations to go another layer deeper if we put coaching into the marketing expense - what was the real ROI all together and it was over 750%.
Why does this matter? You’ve got to know where your money is really working for you. If it’s not getting you an acceptable ROI then adjust or change. You’ll be glad you did.
Want to have fun calculating some of your own ratios?
Download my free eBook “Mind Blown: Nine Key Financial Ratios for Your Business.”
Good luck with calculating your ratios! Remember, building a business is an exercise in practice, and consistent execution so just try to improve month by month and quarter by quarter. Your empire won’t be built in a day.
Oh, and don’t judge yourself if you don’t know all this - it’s ok - you didn’t start your company because you knew how to run your company. You started your company because you are good at what you do.
Building your CEO muscle takes time, intention and practice.
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