Archives August 2023

Return on Investment

Understanding Return on Investment

Do You Know ROI?

Understanding Return on Investment is one of the most important areas of operating a business or running a project. Many shorten Return-on-Investment to ROI. Keep this in mind when speaking with business lenders and investors. 

Return on investment is a performance measure. The purpose of this measure is to evaluate the profitability of an investment. The aim is to measure the amount of return on a particular investment, compared with the investment’s cost. A simple formula is return of an investment is divided by the cost of the investment.

Real Estate Return on Investment

Real estate investors use ROI (Return on Investment) all the time. The ultimate objective of a real estate purchase is to generate profits (returns). Real estate investors put time and effort into purchasing a property that has potential.

Have a Business Plan

When the cost of broker fees, financing and rehabilitation is calculated, there must be a reward for the all the hard work. This is where ROI comes in.

Small Business Return on Investment

Small business owners can calculate ROI by dividing the amount you earned (Net Profit) from their investment. This will most likely be over a multi-year cycle. 

Sales less COGS less Fixed Expense.

Consider depreciation, amortization and taxes that must be paid on any Net Return. These areas are important to understand.

Here are a few examples on how to calculate ROI: 

ROI = (Net Profit / Cost of Investment) x 100

ROI = (Present Value – Cost of Investment / Cost of Investment) x 100

An example is if you invested $50,000 ABC LLC in 2022, and sold your percentage in 2023 for $55,000, you would calculate ROI as follows: 

ROI = ($55,000 – $50,000 / $50,000) x 100

ROI = 10%

It is prudent to pursue ROI of 8% or more on investments. 


Bank Lending Has Tightened

Just to be clear “bank lending has tightened” over the past few months. How do you plan to finance new growth? How are you going to upgrade business technology?

So how bad will it get? No one really knows this answer. Not even the Federal Reserve. Inflation is a dynamic issue. The impact is great. Even with the drop in the inflation rate the damage to pricing has already been done. 

So how does a small business owner survive this challenge? We will try to answer this at the end of this brief blog post. 

Big Banks Receive Warning

There is a lot going on between the Federal Reserve and Big Banks. Simply put “tougher rules”. The Federal Reserve has put forth rules to lower the risk of bank failures. We all know what happened with SVB and other banks in the first half of 2023. The Feds are trying to sure up the banks and our confidence in the banks.

These new rules press banks to tighten their rules on lending, investing, and other areas that impact both consumers and small business owners. A main highlight of the rules is that banks with at least $100 billion in assets will face higher capital requirements. This will force the banks to maintain a much larger liquid assets base to guard against potential losses.

This policy will trickle down to mid-size banks as well.

New Rules = Tighter Banks = Less Available for Lending = Stronger Underwriting Guidelines

When the Banks Tighten You Plan

One thing about America’s small business community is that it is resilient. Business owners survive. The key to survival is knowing when to cut-back, when to plan, and when to change their operations model. 

Small business owners that fail to take action generally see more denials from tightened banks and their partners. Those that Plan are rewarded with financing even during times of tightening. Lending will continue. But the terms of borrowing and underwriting will be different than in previous times.  

We encourage you to Take Action. Develop a Cash Flow Management Plan, Lower Costs, Add Resources, Learn Crypto, Consider Private Equity, Maybe and SBA BLOC, and or Build Corporate Credit.