ROI Calculation (Return of Investment)

                                              This is an important matter to calculate ROI (Return on investment) to calculate business feasibility. Here I am calculating ROI for a distribution to help sales persons.

Formula of ROI :

ROI    =	(RETURN- COST OF INVESTMENT) x 100
	INVESTMENT

To understand ROI, we have to work on basic formula of ROI, below given formula uses when product is selling in cash i.e. no credit in market given by seller or by company.  It’s rarely possible in today business circumstances.

ROI    =	Net Return x 100
	Turnover (Investment)

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First we will discuss on first formula:

ROI    =	Net Return x 100
	Turnover (Investment)

Step 1:  Calculate Gross Return

              Gross Return =  Total Turnover( In Rs. ) * Margin of product

Step 2:  Calculate Net Return

        
               Net return = Gross Return – Total Expenses

Step 3:  Calculate ROI

Example:

                            Total Turnover in a month = 18,00,000    And,     Margin of product = 3.5% ,  office rent = 5000, Electricity = 1000, office furniture cost = 10000, Sales man salary = 4000 and other expenses = 3000.

                  Gross Return     = 18,00,000 *3.5%

                                               =  63,000

                  Total Expenses  = 5000+1000+4000 +3000+10000

                                               = 23000

                     Net Return        =  63000 – 23000

                                                 =  40,000

  

ROI   =	40,000 x 100
	18,00,000

      ROI = 2%

Now, come at main formula of ROI

ROI    =	(RETURN-INVESTMENT) x 100
	INVESTMENT

To apply this formula, we have to calculate investment first.

Step 1:

Investment =  {One day turnover X (Stock holding days + Credit in Market) - (One day                                                                                       Turnover X Credit given by company)}

        * One Day turnover = total Turnover / 30

Step 2: 

Cost of Investment:  This is a loss of “earning of invested amount”. Suppose, a business man deposited ‘Invested amount’ in bank, can earn some interest without any effort on that amount. Or in other hand, invested amount is barrowed from market/Bank.  So we cannot ignore this in calculation of ROI.

Financial cost: it may bank paying interest or interest bearing by business. In general manner it’s around 1%.

Cost of investment = Total Investment* financial cost 

Step 3:

Calculate Net Return

                  Net Return (Net Margin) = (Gross Return – Total Expenses)

                                           * Gross return = Turnover x Margin of product

Step 4:

Calculate ROI

Example:

Total Turnover in a month = 1800000    And,

Margin of product = 3.5%, Infra Cost (expenses) = 10000, Financial cost = 1%,

Credit in Market = 20 Days, Stock in hand = 20 Days, Company provided credit to business=25 Days

1: Investment = {(1800000/30)*(20+20)}-{(1800000/30)*25}

                        = 900000

2: Cost of investment = 900000*1%

                                     = 9000

3:  Net Return = (63000-10000)

                         = 53000

4: ROI 

ROI    =	(RETURN- Cost of INVESTMENT) x 100
	INVESTMENT

ROI    =	(53000- 9000) x 100
	900000

                  i.e ROI = 4.89%

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