Return on Investment or Margin
Overview
Some traders evaluate their business in the wrong way. That's why we will share a new way of evaluating the business.
All of the trading business whether it is a retail shop, a wholesaler, or a manufacturer of small products like wire or saree. These are small traders who have very low margins, say 5-6% margin. They are always very anxious and worried about whether they are in the right business or not.
#1 Case Studies for Evaluating Business
Let us take two case studies to understand how small traders should evaluate their business.
Case Study #1: KEI (Wires and Cables) Industries Ltd.
- It is a listed company.
- It has an annual turnover of Rs. 4,238 crores, its product cost is 72%, i.e. Rs. 3036 crores and business running cost is 21.8%, i.e. Rs. 924 crores. This means its margin is only 6.6%. this data shows that KEI does have a high margin but it is a big and successful company.
Golden rule:
In the trading business, don't see the margin however focus on the ROI (Return on Investment)
ROI means how much you have invested in the business and how much benefit you get from this investment.
So, to get a profit of Rs. 278 crores, KEI has invested or its equity is Rs. 778 crores. When we divided 278 by 778, then we get 35.7%, which is the annual return of KEI and monthly or 3%? Thus, KEI is getting a huge amount of returns.
Also Read 👇
How to Invest Cash
How to Calculate the Cost of Product
Case Study #2: D Mart
- It is one in every of the largest retailers in Asian nation (India).
- It is listed with the name “Avenue Supermarket” in the stock exchange.
- In 2018-19, D Mart’s revenue was Rs. 20,000 crores and its cost of materials was Rs. 17,446 crores. This means 87% of the money was involved in selling the product and 6% of the money was deducted a depreciation, salaries, marketing, administrative expenses, etc. Thus, the margin of the company is only 7%.
- But as discussed, you should focus on ROI and not margin in the trading business, so, let us see the ROI of D Mart.
- Rs. 5,588 crores is invested in D Mart in the form of equity. If you divided 1,422 by 5,588, then you will get a return of 25.4% so, after deducting all the expenses, D Mart is getting a return of 25.4%.
Thus, you need to change your way of evaluating your business. Start evaluating your business on the basis of ROI instead of margin.
If your ROI is 6-7%, then you need to check your business or worry about your business because you can get and ROI of 8% on an FD.
So, you need to check how much more return you are getting from your business than the return on an FD.
For example, KEI is getting and ROI of 36% and D Mart is getting and ROI of 25% that is much more than the return on an FD, which is only 8%.
#2 Steps to Increase ROI
1. Increase your revenue using different strategies and schemes
2. Solid control on cost so that you can increase your margin, which ultimately increase your ROI
3. Keep inventory as low as possible because if you keep more inventory, your interest will be high and your margin will be low, which will lead to low ROI. So, you should move your inventory fast.
4. Use the money received as margin for marketing and expansion purpose. Marketing and expansion will increase your rotation. When the same capital is rotated many times, then your ROI will increase.
Keep your main concentrate on ROI however also make sure that your margins aren't turning into negative.
Keep your investment low to make your ROI higher.
So, you should sit with your team, determine your ROI, and brainstorm how you will implement the above steps to increase your ROI.
Read More 👇
How to Reduce the Cost to Make and Market a Product
Marketing Strategies to Reduce Customer Acquisition Cost
0 Comments