You multiply the unit price by the number of units in stock and add to this value any additional cash or investments in inventory says Aron Govil.
For example, if you sell one unit at $50 and there are five units in the bank (holding funds to purchase inventory), your total return would be:
$50 + (5 x $50) = $250. You invested $250 in order to make a profit of $250.
If you did not invest anything else, but still made a sale for one unit at $50 each, your ROI is 100%:
$50 per unit x 1 unit sold = 100% return on investment [ROI] [return is equal to initial investment]. In this situation you have simply made a profit equal to the price of the item sold.
In both examples you have profited from an ROI of 100%.
Return on Investment is the rate of return on your initial investment. You also need to consider how much money you have spent in advertising, selling, and administration costs. This will give you a more accurate picture of your overall financial status explains Aron Govil. For example, if you have made $5,000 in sales but are still behind by $15,000 due to expenses, your ROI is 0%. Conversely, if you have made $100,000 but are still down by $30,000 after all costs and expenses (such as labor), then your ROI is -30%:
$100k (sales) – 30k (costs) = 70% ROI [profit/initial investment]
$100k – $30k = $70k profit/costs
$70k / $100k = 70%
Your Return on Investment falls somewhere between 0-100percent because you have made a profit of $70,000 compared to your initial investment. This is what you want to strive for in business: making more than you spend!
As well as ROI, investors need to consider the future value of an asset over time. The easiest way to determine how much money something will be worth at a later date is through compound interest (compounding). For example, if your initial investment doubles after five years’ compounding interest (doubling every year), then the total return would be four times greater than your initial investment:
$1,000 (investment) x 125% compound interest rate = $2,500 return. $2000 (inflation) / $2500 (return) = 0.8 (doubling time of five years).
If you invest more money each year and continue to make a profit, the value of the original investment will increase over time due to compounding interest. Compound interest can be described as “interest on interest.” If you have an account with positive balance that compounds interest yearly, then after 1 year you would have both the initial amount invested plus accumulated interest for a total amount in your account. The next year you would earn another round of compounded interest on the new, higher balance. The value of your capital increases exponentially after a certain number of years due to compounding interest. This is how the rich get richer and why many loan companies compound interest daily or hourly on credit cards.
The Rule of 72:
In order to determine how long it will take for money to double at a given interest rate, divide the number 72 by your particular interest rate (72 / %). For example:
$10,000 invested in savings account with 5% annual interest will double in: 72 / 5 = 14.4 years
This means that $10,000 invested in the bank will earn $5,000 over fourteen years due to compounding interest. The total would be $20,000 after fourteen years ($10,000 initial investment plus $ 5000 of accumulated interest).
Some investors may not want to wait fourteen long years before they start seeing their profits increase exponentially explains Aron Govil. If you invest your money elsewhere (bonds or stocks) then you might see results two-fold annually if the particular economy is growing at an average rate of 5% per year (72 / 5).
An annual compound interest rate of 72% would result in doubling the money every 36 months! This creates some extremely wealthy individuals because it is a compounding rate. Take Bill Gates, for example:
As you can see, it’s not the most successful person who makes the most profits, but rather the most profitable person says Aron Govil. However, it is possible to make a profit of $100,000 yearly and still be in debt. If you look at the big picture and compare costs to income, you can increase your profits by increasing revenue and lowering costs. You will reach the point of positive ROI only when you earn more than you spend. Before you start a business, learn about compound interest and calculate how long it will take to double your money at a given interest rate. If you need more money, then invest in your business and other opportunities that will increase your earnings exponentially over time.