One of the most popular ways of calculating if your growth plans will provide the expected benefits is to test them using the Return on Investment (ROI) formula. This will tell you what percentage of return you will get over a specified time. Three years is a good rule of thumb, used by many expanding businesses.
ROI is determined by taking the total invested, working out the increased sales it will generate each year and the resulting net profit, then calculating that as a percentage of the investment.
For example, suppose a business wants to add a new product line that it predicts will cost an investment totaling £200,000 in development costs, plant, marketing and promotion. It estimates the new line will generate £400,000 in sales and £40,000 in net profit each year.
|Timescale||Additional net profit in period||ROI calculation (net profit / investment x 100)||ROI (%)|
|One year||£40k||40k/200k x 100||20|
|Three years||£120k||120k/200k x 100||60|
|Five years||£200k||200k/200k x 100||100|
It’s a good idea to test the ROI with a number of different sales figures. While you may think additional sales could reach £400,000 a year, a number of factors – such as development problems, delays or sales and marketing issues – may result in lower sales in the early stages. You may also wish to adjust your calculation to allow for annual inflation.