Advisory Jun, 25 2014

Evaluate RoI for better returns

Return-on-Investment is important for running any form of business as it plays a very significant role in franchising. If the RoI is considerably low, opening a franchise store can be like opening a Pandora’s box. Read on to know more that how RoI acqui

By Rashi Mathur, TFW Bureau
Feature Writer
Evaluate RoI for better returns

“Time needs to be invested and managed wisely, much more seriously than money. Time is all you have, and you will realise it one day that you have less than what you think.” These words by Manoj Arora scripted in the book- From the Rat Race to Financial Freedom, are of a great significance to every individual. But they hold an indispensible place in the world of franchising. Be it an established brand or a start up, entrepreneurs have a high concern about RoI. Prospective entrepreneurs make sure that the business venture that they are investing in or entering into yields high return on their investment.   

Calculating RoI

For a more accurate calculation, RoI is compared to a standard passive investment. This is calculated by deducting the potential buyer’s normal annual income from the projected franchise income and dividing the difference by the total cost involved in the purchasing of the franchise. If the percentage figure comes out to be higher than 15 per cent, the buyer is making a decent RoI on the franchise.

Attributes like number of man hours and ability invested in the business cannot be measured in quantitative terms. Hence the RoI should be a leap higher than what one would expect in a passive business. Manisha Ahlawat, Managing Director, Vivafit India shares her views: “We estimate Vivafit’s  RoI based on our business knowledge and franchisor support.  We also compare the RoI of Vivafit with that of other businesses as a way to measure the efficiency of different options and then we choose the best one. We calculate RoI based on a cash flow perspective. Taking into account cash-in and cash-out through terms, we reached RoI of 25 per cent.”

Shahnaz Husain, Chairperson and Managing Director, Shahnaz Husain Group of Companies says: “Apart from the amount of capital invested, you should consider your breakeven point and the projected gross income. Next, the return on investment should be considered, i.e. what you are expected to earn on your investment. The one-time cost of equipments as well as the recurring cost incurred on account of material, salaries and bills should be taken into account.  If it is below the expected level, you will not want to invest in the franchise. One cannot calculate investment of time as easily as investment of money. But, if one has been working before, or has had a business, there should be some idea of the return on full investment of time. The business should provide more returns for your time, than your previous work. If the return on capital investment is much less and RoI on time and skills is even lesser then you may decide not to take the risk.”

The franchisee should evaluate his purchase price on facts and not on speculations. The franchisor at times might offer a price based on projected sales which are dynamic in nature. This will altogether affect the investment and ultimately the RoI.

Unlike any other passive investment; a franchisee invests not only money but the most valuable and omnipotent ingredient that is involved is time. Buying a franchise is not a sure shot way to become a millionaire. There are various factors that need to be considered before investing money in a franchise business, such as start-up cost and royalty fee, availability of finance, cost of buying raw materials, individual creativity, territory control and last but not the least the location of the company. Thus while estimating a company’s potential, RoI becomes the foremost objective of a franchisee.

Hidden yet valuable costs

Few hidden costs are also involved in RoI. These are deep seated and crucial to the business. Ahlawat of Vivafit India elucidates this concept by informing: “If we earn/spend non-monetary benefits/losses from an investment, we generate intangible returns and costs. For instances, if we spend $2,000 providing Christmas gifts to our best customers, we might not generate direct sales from that investment, but we might keep them as customers next year. When we spend money on image advertising, we might not be able to identify an impact on sales, but our return includes a reinforcement of our brand among our current customers and increased brand awareness among potential customers. If we spend 20 hours during the month creating an organisation chart or restructuration plan for our company, we lose ability to invoice those 20 hours or make sales, but we strengthen our business operations.”

Franchise Wise

RoI is the most important profitability ratio that determines the success of a business. Others include profit, return on capital employed and payback period. Vivafit’s aim is to achieve a sustainable growth and has focused its strategy on expansion. Ahlawat adds : “Nowadays we are operating three own gyms and two franchise centres. We expect to grow at least 40 per cent until 2016.”

So, the task does not end here. Once the estimated RoI is achieved, the franchisee should aim for increasing the returns. The golden rule of franchising, there exists no direct correlation between the total investment and the amount of money you can make in the business. Returns in franchising differ all over the board, depending upon on the concept, the industry, the market and the operator. As a general rule of thumb, carefully peruse and investigate about the market conditions to ensure that the brand you are investing in fetches you an average annual income return, from the business equal to at least 30-50 per cent per year of the total initial investment for the franchise unit. So, hope you franchise wisely and earn fruitful returns on your investment.

Related: Location: look out for the best

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