Return on investment is a measure that is widely used in a new business analysis that is planned to be implemented. Many business people create a business based only on desire, so that when the business goes bankrupt it is not so surprising because there is no initial analysis of the feasibility of the business itself.
So, it is highly recommended that before starting a business, you first need to conduct a feasibility study of the business so that you can know the time needed until the capital can be returned.
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Just imagine if the business capital comes from a bank loan, of course we want the loan to be returned as soon as possible and if that hope is not met, the collateral placed in the bank can be auctioned.
Then, what exactly is return on investment?
Meaning of return on investment (ROI)
Simply put, this shows the time needed for an investment in a business to return to its original value.
To be clearer, for example, the business capital is 1000, well, with the calculation of return on investment, it can be seen how long it takes for the value of 1000 to return.
In various economic literature, the formula for calculating return on investment is ROI = Net income / cost of investment X 100% ROI calculation is one part of a business feasibility study where there are actually many formulas for calculating whether or not a business is feasible if it is run.
Why do we need to calculate Return on Investment?
There are several important reasons, which are the background for us as novice business actors to calculate return on investment.
- Avoiding the risk of business losses
- Knowing the amount of capital and profits obtained
- Being the basis for making long-term investment decisions
Although on the one hand, as explained above, there are benefits to calculating return on investment, on the other hand, there are also disadvantages, such as:
1. Ignoring the time factor
We all know that the dynamics of time that are constantly changing always bring issues that can destroy a newly established business at any time.
This factor cannot be calculated in the return on investment calculation formula. It could be that when calculating net income, using the prevailing market price when we calculate ROI. However, in the next
2 years, there is a possibility that the prevailing market price will drop drastically so that it will result in losses.
2. Vulnerable to changes in government policy
Policy is an instrument used by the government in managing a country. For example, to obtain state revenue, one of the taxation instruments used is regulated through a tax law regulation. This is also not included as one of the variables in calculating return on investment.
Even though we know that every business is always a target for taxation by the government. For example, if government regulations regarding value added tax rates or income tax change, at the beginning we have calculated ROI optimistically which shows that the business is feasible.
However, 2 years later, unexpectedly the government raised the income tax rate and as a result changed the feasibility of the business, making it no longer feasible.
How to calculate Return on Investment
It is quite simple to calculate the return on investment whose formula has been explained earlier. Case example A small industrial business engaged in the pineapple processing industry has a gross income of 1,000,000, while the capital used is 600,000.
That means the net income of the small industrial business is 400,000, so the return on investment is 400,000/600,000 x 100% = 66.7%
This ROI calculation is quite aggressive, indicating that the pineapple processing business is very feasible if carried out, because it only uses a little capital but gets quite a large profit.
So the higher the ROI value obtained, the more feasible the business is to run. Those are some things related to the calculation of return on investment in assessing the feasibility of a business.
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