Return on investment (ROI) is one of the most important factors that small business owners should be tracking. Most Hispanic entrepreneurs understand ROI as an ideal bottom line aspect of doing business, but the particular role of ROI escapes many small enterprises. A solid understanding of ROI is essential for Latino business owners, especially for those who have an online presence.
What ROI Really Means
Every business endeavor entails an investment of some sort. Even bootstrapping entrepreneurs must resort to owner financing or sweat equity—the time and effort that is put into a business. ROI is expressed as a ratio of profitability, but it does not point to pure profit.
For small business owners, ROI expectations are higher than for large enterprises due to profit margins; for example, a small online retailer of fashion watches who makes a $1,000 investment in inventory acquisition would like to see a 200 percent ROI within a month. This means the retailer will realize $1,000 after covering the initial investment.
ROI is a factor that every Latino business owner should consider with every decision made and not just with monetary investments. When associates, friends or relatives are enlisted to help grow the business in some way, they are providing value—even if it involves passing out flyers in exchange for coffee, pastries and a heartfelt expression of gratitude. There must be an expectation of ROI in terms of how much was returned by the distribution of flyers.
ROI Calculation and Measurement
Many tools can be used to calculate ROI, but nothing beats the following simple formula to gain initial understanding:
ROI = (Return – Investment / Investment) x 100
Small business owners who run simple enterprises can get away with calculating ROI with just pencil and paper. Those who venture into online startups that require outside financing and marketing campaigns will have to consider different figures such as total revenue and net profits in order to calculate the return. On the investment side, marketing campaigns sometimes involve a slew of costs that should not be left out of the calculation, such as technical costs, the time spent managing and monitoring the campaign, creative fees and the actual costs of producing each sale.
For a business that measures sales in terms of units, such as the aforementioned online retailer of fashion watches, a more accurate ROI formula for a marketing campaign would look like this:
ROI = (Gross Profit – Marketing Investment / Marketing Investment) X 100
In the example above, the retailer can add up the gross profit realized during the time the marketing campaign was active, essentially the number of watches sold.
Effective ROI Management
Entrepreneurship is often a matter of trial and error as well as constant evaluation. Hispanic business owners who establish an online presence are bound to try various marketing campaigns, and these days, they should be taking a good look at ROI claims before choosing an approach.
The tenet of ROI is to always aim high, but even this is relative. For example, if the online fashion watch retailer decides to open a brick and mortar storefront, a good strategy would be to claim a business listing on Google Places. This is a free listing from Google, and the verification process is pretty easy. If three shoppers show up and purchase a couple of fancy watches thanks to Google Places, the ROI would be rather high, but it does not add that much to the bottom line.
If, however, the online watch retailer decides to purchase some Google AdWords to accompany the store listing and if this only manages to increase the number of shoppers by two, the ROI would not be as high. This is why it is important to manage ROI when dealing with online marketing campaigns. Ambitious Latino entrepreneurs who always strive for high ROI must keep in mind that stabilization is preferred during periods of business downturn.
In the end, ROI should not always be compartmentalized. The cost of sales and marketing can be combined when calculating the investment. The overall return can be split into specific time periods or upon reaching certain milestones. It is more important to incorporate ROI projections into every business decision, as well as make a habit of performing periodic calculations.
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