Have you invested money in a business and want to assess whether it is profitable? Getting a return on an application is what investors want most. But how to calculate the franchise ROI , anyway? Beforehand, know that a series of variables must be taken into account, such as mandatory fees and the commercial point itself.
Another factor needs to be highlighted: it takes time to generate revenue that defrays expenses . Therefore, it is essential to evaluate, before investing, what is the profit perspective of a business. The good news is that the average return on a franchise can reach 23% , varying according to the segment and even the profile of the franchisee.
In this article, I will explain what ROI is, how to use it in strategic planning, what is its importance, what to evaluate before obtaining its result and how to calculate the franchise ROI. Good reading!
What is ROI?
As the acronym suggests, the return on investment (ROI) means the profitability that the franchisee will have , in a given period, from the application made. It is one of the main indicators of a company, after all, any investor wants to know the profit that he will obtain when investing.
How to use ROI in strategic planning?
Knowing what the profit perspective is based on the ROI calculation, the franchisee will be able to plan his business strategically . This can be done at any time, that is, both in the phase when the amount invested has not yet been recovered and in the period when the application starts to bring satisfactory results.
After all, a franchise ‘s ROI is an indicator that provides investors with support so that resources are used intelligently. However, it is essential to take into account other variables, such as the amount of fees to be paid to the franchisor and the working capital reserved to keep the company supplied.
How important is ROI for the franchise?
ROI is extremely relevant in the budget definition of a franchise . In addition, this indicator serves as a parameter for the franchisee to understand which type of action generates more or less profit and which strategies can be devised to optimize the business.
Below, I have separated a list of the main reasons why you should take this indicator into account when analyzing the results of your franchise. Look!
- assists in making more effective decisions ;
- provides support to assess business progress;
- allows comparison with other indicators of the franchise ;
- offers greater security to the franchisee;
- favors the sustainability of the franchise;
- makes it possible to draw up growth plans in accordance with the potential of the business .
What to take into account when calculating ROI?
Whoever invests in opening a franchise wants to know what return they will have on the application – in fact, when betting on a business, it is essential to evaluate, beforehand, the profit perspective that it will offer. For this, the franchisee must take into account a series of variables, which are embedded in the calculation of ROI . Find out below what they are!
The franchise fee is a mandatory and unique amount that must be paid when signing the contract. Thus, the franchisee is entitled to use a certain brand. This is a significant amount, so it needs to be included in the ROI calculation.
As you may know, working capital is the amount needed to keep a franchise in operation . This type of reservation is essential for the survival of any business. Therefore, the franchisee needs to separate a percentage of the amount invested, which will be used to maintain the unit’s inventory and pay suppliers, for example.
Allowed by law, royalties are the periodic payment for the use of a brand or franchise network system. They are charged, too, for the services provided by the franchisor. In general, the amount is collected monthly, with a percentage stipulated on gross revenue. Therefore, it is important to check the conditions in advance.
It is the franchisee’s responsibility to choose the commercial point . In fact, the decision must be strategic, since the place of operation must be accessible to the public interested in the services. It is also necessary to analyze which is the best alternative: buy or rent the property. Remember to take into account expenses with renovations, maintenance and installation.
As much as a franchise is small, it is good tone to have at least one receptionist to organize your schedule, serve customers and keep the place minimally presentable. Your business may even stop taking off without the presence of that employee. Obviously, hiring will generate employment costs, which should be included in the calculation of ROI.
Electricity, water and tax payments are examples of expenses that also need to be included when calculating ROI. Thus, you will have an extremely accurate result of the time it took to start to profit from the investment of your franchise .
After all, how to calculate the franchise ROI?
If you want to find out how to calculate the franchise ROI, know that there is a formula for that. Thus, the result of the return on investment is achieved as follows:
- ROI = (Investment Profit – Investment Cost) / Investment Cost * 100
As you can see, just subtract the profit from the cost invested. Then, divide the result by the value of the initial application and, finally, multiply by 100. The answer obtained concerns the percentage of gains from the investment made in the franchise .
If you have invested R $ 10,000 and achieved revenue of R $ 18,000, your return would have been 80%. See the formula!
- ROI = (18,000 – 10,000) / 10,000 * 100 = 80%
So, do you know how to calculate the franchise ROI? Remember that in order to do the math correctly, you need to add up all the values of the application in advance. With the result in hand, it is up to the franchisee to carry out financial planning that involves the intelligent and strategic use of the amount reached . Thus, you can expand your business and profit more and more.