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While investing in a franchise you would expect good returns. And there would be an urge to know every detail of how well your investment is performing. This is where calculating ROI of a franchise comes into the picture. It lets you see whether a certain investment is growing or not.
If you have just heard about ROI (Return on Investment) but don’t understand the concept properly, we are here to help.
In this article, we have shared:
- What is ROI
- How to calculate ROI for a franchise business
By the end you will have a clear understanding of both these things. It This will help you in multiple ways while starting and running a franchise business. So, without any further ado, let’s start:
What Is ROI
Return on investment, commonly known as ROI, is a popular profitability metric. It is used by investors to evaluate how an investment has performed. The investments can be into real estate, stocks or a business.
ROI can be calculated using different formulas and presented as a percentage. It also helps in comparing and ranking different investments in an individual or different projects. However, there are some limitations and challenges of ROI as well.
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Investors choose a company or a project with a good return on investment. Because high ROI implies that a company or a project is successful in using the investment money and generating high returns. In case you have shortlisted a few profitable franchisees, you can compare their ROIs and choose one with a higher ROI. There is a simple rule to interpret ROI in any business, the higher the ROI, the better it is performing.
Note: ROI should not be the sole criterion to choose a franchise business over other. This is just one of the many parameters you should look at while joining a franchise.
For instance, if you are satisfied with other aspects of a business like its brand value, quality of services, etc. but it has a negative ROI, it may not be a good option for short-term investment.
What is negative ROI
In layman’s terms, ROI is the sum you are earning on an investment. So, negative ROI implies the investment has failed or the project has lost money. It happens when a business incurs financial loss during a specific period of time. The term “negative return” can either be a net loss on all businesses or investments or a loss on an individual investment.
For example, if you have invested ₹10,000 in a business and a year later it generates ₹5,000. In this case, your investment had a negative return.
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In order to take a better decision you should know how to calculate ROI of a franchise business, so let’s see how it is done.
How To Calculate ROI For A Franchise Business
There are multiple formulas/methods for calculating ROI of a franchise business. Here, we will use:
(Benefits – Cost) / Initial Investment × 100
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To calculate ROI with utmost accuracy, you must know the total costs and total returns in a franchise business. Hence, make sure you have a complete list of everything in which money has been invested to run a business as well as all the returns. All of this information can be found in business spreadsheets, accounting journals or accounting software. Meanwhile, let’s see the common things you will need to check:
- Investment to start the business: It is basically capital expenditure made on fixed assets such as land, building, equipment, etc.
- Returns from the business: Revenue acquired during a specific period of time.
- Expenses to run the business: All the expenses or costs incurred to run the business may include money spent on purchasing inventory (raw materials), hiring staff, training staff, paying salaries, paying bills (electricity, water, Wi-Fi), business software, etc.
You can gain an even better understanding with the help of an example.
Suppose you invested ₹10,000 in machinery, ₹4,000 in branding ₹10,000 in the construction of a store. Your total initial investment is ₹10,000 + ₹4000+ ₹10,000 = ₹24,000.
The expenses or costs that you have incurred within a year of running the business include ₹10,000 for salaries, ₹10,000 for rent, ₹10,000 for marketing and promotion and ₹3,000 for taxes. The total expenses or costs sum up to ₹33,000. At last, the revenue you generated in the 1st year is ₹52,000.
In this case, you can calculate ROI as follows:
(Benefits – Cost)/ Initial Investment × 100
(52,000-33,000)/24,000 × 100 = 79.1%
In this example, the ROI is 79.1%
To give you a better understanding of how to calculate ROI of a franchise business, we are sharing how we do it for Tumbledry.
ROI Of A Tumbledry Franchise Business
We list all costs incurred while setting up the business or initial investment. It includes the shop’s security deposit, cost of machines, cost of store construction & interiors, cost of electricity load, branding, logistics and franchise fee.
Then we list all the costs incurred while setting up the business or initial investment. It includes the shop’s security deposit, cost of machines, cost of store construction & interiors, cost of electricity load, branding, logistics and franchise fee.
At last, we calculate returns/ benefits acquired in the business during 1 year considered at optimal utilization of the capacity of the store.
This is how the data looks:
Initial Investment | 2400000 |
|---|---|
Annual Revenue/ Benefits | 5280000 |
Annual Expenses/ Cost | 3360000 |
Annual Profit | 1920000 |
Note: The numbers are for representational purpose, actual data may vary.
Calculate the exact ROI of the Tumbledry franchise business.
(Benefits – Cost) / Initial Investment × 100
(52,80,000 – 33,60,000) / 24,00,000 × 100 = 80%
The ROI for 1 year of a Tumbledry franchise is 80% which is a positive and high ROI. It keeps changing depending on the changes in cost and benefits incurred in a year.
You can also calculate ROI of a franchise using this method and see whether it can offer a decent return on investment or not.
For more such information, you can keep visiting Tumbledry as we post a lot on franchise and business-related things. Also, if you are interested in the laundry and dry cleaning franchise you can check out details about the Tumbledry franchise model.
Disclaimer: The opinions expressed in this article are those of the author. They do not necessarily purport to reflect the values or views of Tumbledry.
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