How much money do you have invested in your business? The amount of money invested in your business is calculated by added together the total cost of the assets of your business and subtracting the amount of money owed on those assets (these may be loans or equipment leases.) These figures can be easily determined by reviewing your business Balance Sheet.
Assuming this is not a negative number (and let's hope it isn't), multiply this figure by 5%, 10%, and 25%. Write the percentages on a piece of paper along the side of each one, the dollars generated by the respective percentage.
For example: If the dollars invested in your business equals $500,000
|
5% |
= |
$25,000 |
|
10% |
= |
$50,000 |
|
25% |
= |
$125,000 |
Using your numbers and arriving at your percentage figures, can you honestly say that your average profit over the past three years equals 5, 10 or closer to 25% of your invested capital?
Now consider this: a very safe investment in a bank CD will pay you something close to 5%. No risk, no headaches, just a small safe return on the money you invested.
A less safe investment, like "strong" stock such as General Motors, AT&T or PG&E will return close to 10%. Again, no headaches, little risk and a fairly respectable return on your investment.
A speculative investment like"junk bonds" will probably give you a 20-25% return. But this time, it's high risk and lots of headaches --something like owning your own business for yourself and so your rewards/returns should be high.
Here's hoping your numbers are always written in black ink!
FROM ROGER'S DESK!
Look for the next article on Budgeting in the Business Plan
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