Started a new business venture? Or planning to do so? One of the most critical points in determining which direction to move in is to consider the ROI, or Return on Investment of the business. If a business venture has a high ROI then it is most certainly a good idea to embark upon that.
Return on Investment is primarily revenue minus cost divided by investment. So if you have invested Rs 10,00,000 in a business and your average return on that is Rs 15,00,000 then your ROI is 1.5. Theoretically, a venture that requires the least investment but yields the maximum returns is the best way to go. But the irony is that such a window of opportunity is generally open for a short period only. Since it is very profitable to begin with numerous players jump in that field, sending competition levels rocketing. Hence the returns are automatically curtailed. Computers and software business are an ideal example of this. At one point of time it was a booming sector and attracted countless entrepreneurs who got excellent return on investment. But today the returns in this field are no more that high due to stiff competition.
An example of a business venture that requires low investment but can give high returns is a consulting services firm. The cost involved is largely confined to office rental, salary and administrative costs and investment is even lower. The ROI of a consulting firm however can be very high in proportion to its investment. The fact that such a firm is likely to enjoy high and durable gross margins and high and durable after-tax profits generates a satisfactory “harvest” price for the company.
On the other hand, if the initial investment itself is very high and one is not assured of a proportionally high ROI, it might be risky to get into that business. If initial investment involves setting up of large factories and plants, entails a huge capital cost and other overhead costs one should think deeply before rushing into that field; for market returns are never guaranteed, so why not try to nip the risks in the bud?