Small Business Java: How To Brew A Satisfying Return On Investment (roi)

Making a profitable small business investment is like brewing the perfect cup of coffee

. What do you need to know to create the greatest financial return on strategic opportunities? The challenge is to discover and apply the key capital ingredients, analytical tools, and business processes to measure, brew and pour an excellent return on your investment (ROI).

I have learned how to brew a great cup of coffee using drip makers, the French press method and those little prepackaged cups. I have also learned the art and science of measuring, evaluating and investing in opportunities for small and large businesses. Let us dive deeper into the best measurement tools and financial strategies to increase the likelihood of generating the greatest return on your business investment (ROI).

A satisfying cup of coffee is brewed with key ingredients and essential processes. Likewise, any business investment return is a product of key financial components and activities. It is widely accepted that water is the most important ingredient in a great cup of coffee. Bad water equals bad coffee. Great tasting water will contribute to an outstanding cup of Joe. In small business finance, the water of any business investment is the gross revenue generated by the asset you buy or build.

The top-line revenue comes from sales, rents or other sources of income from the investment. The credit strength of the customers or tenants determines the quality of revenue and is a key factor when evaluating a business investment. The gross revenue is then filtered through layers of operating expenses, non-operating expenses and allocated management overhead to get a pour of net operating income.

Great coffee beans are essential to a great cup of coffee. How you grind the beans, the quality of beans and the amount of ground coffee all play a role in what is poured into the cup. The beans in small business finance are your sources and uses of capital. You can make a business investment using debt or equity funds. Make sure you use the right blend of equity and loan dollars to generate positive leverage and provide sufficient distributable cash flow to the stakeholders. Use high quality equity dollars that are invested for the long term at a reasonable expected rate of return. Use loan dollars from trusted lending sources to get the most favorable terms and pricing.

You should understand how to measure your cost of capital, also know as the rate of return, in order to accurately assess any business opportunity. If the business investment generates a rate of return below your cost of capital for loan dollars then you will be generating negative leverage. Your equity investors will be disappointed if the return on equity is below similarly risk weighted investments. It is important to understand and calculate your company weighted average cost of capital which is a blended rate of return on equity and loan dollars.

Every small business owner and leader should know the fundamentals of financial modeling. Learn how to model and interpret the pro forma return on investment (ROI), internal rate of return (IRR), and net present value (NPV) for your business investments. Knowledge is power when evaluating business opportunities. A cash flow waterfall is another important financial model to show potential lenders and investors the estimated distributions to service debt and equity during the investment time horizon.

The brewing process for great business investments starts with sound financial planning and ends with the drip of distributable cash flow. Your strategic capital plan should include the results from financial modeling. Due diligence is critical to uncover all aspects of the investment. The search for debt capital should be conducted on a competitive bid process to get the best terms and pricing and minimize recurring debt service payments. The level of outside investor equity capital should be weighed against the expected return on equity (ROE), the potential loss of management control and other important factors.

You have discovered the ingredients, skills and processes for brewing a great return on your business capital. A value-added investment starts with high quality revenue and the right grind of debt and equity capital. Carefully measure the expected return on your investment (ROI) along with other financial performance indicators. Precisely weigh your equity and debt cost of capital to meet expected returns. Brew your investment through the filter of a detailed strategic capital plan to increase the likelihood of choosing the best business opportunities.

by: Michael Shelton

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