How To Calculate An Roi For Your Financed Equipment
ROI is fairly simple to calculate if you have the benefit of hindsight
. In fact, both wisdom and long division are easy with hindsight! However, if you need to calculate an expected ROI for your equipment financing or even business car finance before you get the loan, it can be a little trickier. We help you set down the math youll need to take into your bank managers or equipment financing brokers office, by calculating your expected future ROI from a new piece of business equipment.
Expected Income from Equipment Purchasing
Income can be generated by a new equipment purchase in several ways:
Creating the ability to sell more stock
Creating better quality stock which is more in demand
Creating stock which attracts higher pricing
Supporting the business image as a technological leader, helping to both keep and attract customers in a niche
Reducing repair time
Reducing operator errors
Reducing operating costs, either in labour or energy or other materials used (more efficient)
As you can see, not all of these methods of generating income are easy to track! The key to calculating your ROI after equipment financing will be forecasting the ways you expect the equipment to generate income or improve profitability, and tracking what happens currently.
For example, if a new computer is expected to improve profitability by reducing time spent in troubleshooting problems, you must first track the time spent in troubleshooting to calculate that portion of ROI.
There are also some ways that equipment purchase can generate income which might never be measurable, though. For example, if potential customers are going across the road because your equipment creates an outdated or substandard product, how will you know? The only methods of calculating ROI in this situation are imprecise you must simply track overall business profitability, subtract any additional costs from the new equipment purchase, and attribute increased profitability to the new equipment.
Is My Calculated ROI Worth It?
As a general rule, any piece of equipment for which you seek financing should pay for itself within 2-3 years. If you have taken out equipment financing or car finance, this will also include the cost of borrowing the money itself.
Calculating ROI Retrospectively
This is much easier and less fraught with what-ifs and do I dare?s than trying to predict the future. However, it is not necessarily a simple addition, subtraction or division. The basic formula is:
(Income from investment minus cost of investment)
Divided by total cost of investment to obtain a percentage
Equals Return on Investment
The tricky part of retrospectively calculating ROI is assigning a portion of your income to that specific piece of equipment. For some pieces of equipment, this will be easy. For example, if you bought another printing press which allowed you sell twice as many magazines as you did before, you could simply take your earlier profit from selling magazines and double it.
However, as explored above, income generation by a piece of equipment is not always obvious. The best you can do is to track your finances well, and make judgements on circumstantial financial evidence when necessary to estimate your ROI.
by: belindadarling
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