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What is Return on Investment and how is it derived?
The First question raised by investor is what is the returns on investment, that is the investor would like to know if he is investing in your company what returns can he expect after a certain period of time.
Return on investment is done on a certain block period of say 3 or 5 or 7 years depending upon the revenue generated by your project and for how long you want to have investor with you. For example if your business plan gives projections that in 5th year you can exit the investor then the Return on investment is calculated for 5 years.
Total Benefit – Total Cost / Total Cost
Total Benefit investor gets – Total Cost invested divided by Total Cost invested
This helps investor to understand if he is investing 20 lakhs in your company and profit you will give to investor for a period of 5 years the amount received by investor is added. For example if you had given 8lakhs every year for 5 years then it is 40 lakhs the investor would have accumulated as profits so for his investment of 20 lakhs he is getting returns of 50% from your project.
Just to ensure 100% return on investment don’t go with very high numbers of revenue, be realistic don’t be too optimistic or pessimistic. So be clear with what can be delivered by your company, just to get investor don’t show 120% returns in 5 years is what ROI my company can give.
Also you need to understand that you should have breathing space, you cannot delivery every time the best of results and every time you delivery the bench mark gets higher and higher. It’s advisable to have achievable revenues which lead to ROI.