Return on Investment (R.O.I):What’s Reasonable? Entrepreneur Investment Strategy #5

12 Nov

It is human nature to compare ourselves to others. When we hear Company X made a 50% markup on their products or Neighbour Y’s investments grew by 15% last year, we think it is reasonable to want an equal (if not better) return on our business or investment. Research can help you determine what is “reasonable” given your particular circumstances.

Business – if you are in a service business, a mark-up of 50% may be nothing more than a beautiful dream. Instead of fantasizing about a 50% R.O.I., why not find out exactly what comparable businesses are achieving in profitability? Start with some published industry standards.

investmentWhen I was running my language schools, I had trouble getting this information as almost all schools are privately held. I eventually discovered a resource provided by the Risk Management Association (rmahq.org). It provides a balance sheet, income data and financial ratios compiled from the financial statements of more than 107,000 commercial borrowers, classified into five income brackets in over 400 different industry categories. Statistics Canada also has a complete library of financial statistics relevant to the Canadian economy. Your accountant or business coach will probably have some other ideas.

Investing – There are so many investments to choose from that you could almost say it is like going to the shopping mall and looking at all the stores. You can buy women’s clothes, men’s clothes, children’s shoes, perfumes and soaps, etc. But what do you really need? If you need a suit and shoes for work, you will concentrate on visiting those stores only, and you don’t care if the family walking beside you just got a great deal on toys at the Disney Store! It’s the same thing when it comes to choosing investments.

Share your goals and dreams, your current financial position, and your time horizon with your Advisor and he/she will help you sift through the many investment options to select what is right for you. Your investment choices will depend on a variety of factors including your comfort with taking risk in order to achieve growth. If, for example, you have a conservative approach and your neighbour is very aggressive, you won’t achieve the same results in the “good years.” You also won’t lose as much during the market downturns.

So what’s a reasonable R.O.I.? It depends. That sounds vague but with more information about you, I can give you an answer.