In Part 1 of this article I talked about how you work out if an investment is worth making. Now I’m going to look at how you work out what the ROI (Return on Investment) is for something you’ve bought, and in the final post I share some examples from me and some other people about what’s worked for us – and what hasn’t.
What is Return on Investment?
Return on Investment (ROI) is what you get out of something as compared to what you put into it. A straightforward example is if you invest in some stocks and shares. If you put in £10,000 and get £1,000 back on top, that’s a good ROI. If you put in £10,000 and get back £8,000, not so good.
It’s not quite that simple if you’re looking at your own investments, though.
Time / money / effort
Investments and their returns can be subdivided into several categories, for example, time, money and effort.
- Time: You might invest your time in learning a new skill or trying out a new tool, or writing your web text yourself.
- Money: Lots of products and services and memberships cost money to buy. Even if you’re bartering, there is still a “cost” involved, even if you’re paying your proofreader in falafels!
- Effort: I’m including emotional/psychological factors here. You might put a lot of yourself into going out networking if you’re shy and would rather stay at home. Chasing late invoices can be full of effort if you hate hassling people for money. Working part time and running your business part time can involve a huge emotional and psychological investment, as can building relationships with your clients.
Returns on Investment:
- Time: Do you save your time by using a new product or by out-sourcing? Your time is also money, of course, but there is only so much time in the day, or week, or month, and you should really be concentrating on doing the core tasks that only you can do, whether that’s making your jewellery, editing novels or selling widgets.
- Money: If you streamline your production line with a new machine so you can make and sell more items per day, or get your invoices paid on time and improve your cash flow, or you buy a tool that makes your hand-made cards look more professional, then whatever you’ve done has saved you money, or made you more money.
- Effort: If you hate doing something and you can pay someone to do it for you, or you want to branch out into a new area of work that you find attractive and interesting but need to do a course to get into it, or, indeed, you’re tired of the day job and know that by working hard on your business you can move away from it and gain a more free and flexible lifestyle, then those all save you effort or bring you an emotional gain in the long term.
These factors can inter-relate, so you might get something like this:
- I spend MONEY on an accountant and she saves me MONEY in terms of the tax I pay
- I spend TIME setting up automated invoicing systems and save myself TIME every month when I run my invoices
- I put EFFORT into networking and save EFFORT in getting new clients in other ways I don’t like to use, like cold-calling
- I spend MONEY on an accountant and she saves me time working on my accounts
- I spend TIME setting up automated invoicing systems and make more MONEY because I’m more efficient, and save EFFORT tracking down invoices and chasing up late payers
And of course, you can have negative or neutral returns on investment, too:
- I spent MONEY on paying to advertise on this website, but I’ve never directly made any MONEY from it (referrals can be tricky to work out as people sometimes see your name a few times before they buy, but if you pay for membership or an ad you should be able to see some direct worth coming from it)
- I invested lots of TIME writing my blog but no one looks at it so I can’t be making any MONEY from it and if no one reads it and I never get any comments so I don’t get any emotional (EFFORT) output either
- I made MONEY making these rip-off teddy bears but I feel awful that I went against my principles
You get the idea.
So, is it worth it?
An investment, whether it’s in a product, a service or something less tangible, is only worth it if you get more out of it than you put in.
This can be very subjective. If you hate doing your bank reconciliation, you might be happy spending more on an accountant to do it for you than your friend, who quite likes doing it. If you join a professional association but get no business, kudos, support or fun through it, then it’s not worth paying those fees next year – but that can be very different for your colleague at a different stage of her career, as we will see.
So, it’s a question of sitting down and looking at what you’ve bought, and working out whether the return on investment, in terms of money, time or less tangible factors is worth it. You can do this in advance, too, for example “I need a new computer, it will cost me money but save me time recovering from crashes and increase my income as I can do more work more efficiently”, but you MUST also do this in arrears, rather than spend-spend-spend and never tot up the benefits.
Next time I’ll be talking about the investments I (and some other people) have made, which have been worth it and which have not.
How do you know if it’s worth investing?
Interested in finding out how I made the transition from part-time to full-time self-employment and built my business safely and carefully? Take a look at my new book, out now!
May 23, 2013 at 12:28 pm
Another excellent summary about the importance of reviewing the investment you are making than you Liz. I have seen people putting a lot of time and effort into things that are not gaining them anything at all – so this reflection is a useful reminder.
Liz at Libro
May 23, 2013 at 12:29 pm
Thank you, Kate. Yes, it’s easy to forget the “review-modify” part of the investment or development cycle but it’s so vital to keep an eye on these things.