Business Venture Feasibility: The Return on Investment
Question: “Is it worthwhile?”
Now that you have determined sales, costs, and profits, you are in a position to take a hard look at the venture. There are two things in particular that you should look for:
The minimum value of the total sales you will require to cover your expenses. This will give you an indication of how much risk is involoved in the venture. This is often called the “break even sales point”.
The rate of return on your investment (ROI – return on investment)
Follow these steps to find an answer.
1. Calculate the gross profit percentage (subtract cost of goods sold percentage from 100%)
2. Find total expenses (cash operating expenses, interest, and depreciation).
3. Use the following formula:
|Break even sales =|
Gross profit percentage
4. Express “net profit after tax” as a percentage of the investment (the money invested in the business) to arrive at an approximate return on investment.
|Return on investment =|
Net profit after taxes
Investment (personal plus others)
Question: “Should I go ahead with the business venture?”
The decision on whether to go ahead with the venture is the final and most important decision you will have to make,
Follow these step to make a decision.
1. Review the information on break even sales and return on investment.
2. Compare break even sales with the total sales target.
3. Compare the return on investment figure with the return you would receive from a fixed deposit (ie: bank account or mutual fund).
4. Make a decision based on the scores you calculate below.
From the statements below, select the one that applies:
|Your Score||Score Grid|
|Total sales target is greater than break even sales by 5% or more|
|Total sales target is greater than break even sales by 5% or less|
|Total sales target is less than break even sales|
|Return on investment is at least 10% points more than the rate of interest you would get on a fixed or term deposit|
|Return on investment is between 5 and 10% points more than the rate of interest you would get on a fixed or term deposit|
|Return on investment is between 1 and 5% points more than the rate of interest you would get on a fixed or term deposit|
|Return on investment is less than the rate of interest you would get on a fixed or term deposit|
5. Total the score.
6. Check the score on the scale below:
Unfavorable: 0 to 10
Favorable: 10 to 20+
Please remember, this is just a measurement. Use your judgement to determine overall viability.