Entrepreneurs are constantly making decisions about where to best spend their cash. They generally have a list of opportunities to consider. But what is the smartest decision. Trying to decide what next strategic step to take with the business should start with an analysis of expected return on investment.
But why is calculating an expected return so important? Basically, it gives you a method to prioritize your opportunities. If you determine the opportunities that are the most profitable and do those first, they can finance the second and third on the list. Large companies are generally very good at this. Any opportunity that is presented has a hurdle rate that needs to be met before any money will be allocated to that project. Smaller companies need some sort of evaluation method to help them decide what to do.
Additional benefits from calculating an ROI on investments:
First, it expresses in some formal format what you are intuitively doing when you put one project ahead of another. I assume you feel that the next project you are doing is because you feel it will produce more revenue for the effort or that it is strategically the most important.
Second, when you quantify an expected outcome that gives you a budget to measure your opportunity against what you expected to happen. When you do that and things don’t go according to plan, it puts pressure on you, at a very early stage, to change something to increase the probability that you will achieve the results you initially expected. Sometimes just a little extra effort or a mid-course correction early on will help produce great results. That is why measuring progress is so important.
Third, when you achieve the result it creates confidence. And confidence gives you the ability to make future decisions with more clarity and crispness.
