A lot of individuals start and establish organizations for different reasons. One of the most common reasons is “to make a lot of money.” But in the case of a non-profit organization, their reason is “to grow and enhance the cause.” The main reason of people who are inclined in the financial industry is to improve Return on Equity (ROE).
Return on Equity is also referred to as Return on Investment (ROI). However, a lot of business owners who still do not have enough understanding about what Return on Equity truly means. Business owners like you should have enough knowledge about Return on Equity. This way, you will be able to get a lot of benefits from what you possess.
The only way to achieve this goal is to increase your knowledge and understanding about this matter. Basically, Return on Brand Equity is net income divided by investment or equity. It does not get any simpler than that. However, the question is how Return on Brand Equity is derived. Well, there are three components that derive ROBE (return on brand equity).
• Total Asset Turnover
This is the sum of sales obtained from the assets of the company.
• Net Profit Margin
This is the amount that the company keeps from the total sales.
• Equity Multiplier
This is the amount that the organization utilizes from the investments in the firm or company. This element is now the equity.
Total Asset Turnover
Total Asset Turnover refers to the revenue of the organization. This amount is derived from the assets of the organization. It is commonly referred as efficiency ratio by finance people as this measures the production rate of the organization. Every industry in the business world has its own benchmark for organizational growth. However, there is a general rule that states that high ratio means good revenue or production.
In order to enhance the Total Asset Turnover of your business, simply measure the efficiency of your greatest assets. For entrepreneurs in the retail industry, the main goal is to sell inventory repeatedly and rapidly. In the case of companies that sell real estate and equipment, the objective is to maximize their revenue from their fixed assets.
To improve Return on Equity (ROE), there is another method that you can use. You can maximize your Total Asset Turnover by decreasing your total assets but at the same time you have to maintain or even increase your sales. In the retail industry, it can be done by delivering low inventory in small locations. In the case of manufacturers, they should outsource particular production capability to other organizations that have underutilized facilities. This method can also be applied for restaurants. It is done by opening cost-effective locations or finding venues that only require low costs.
Maximizing Total Asset Turnover has now become a popular strategy because of economic crises. For instance, high-end chefs choose to operate “lunch trucks.” They decided to find cost-effective venues in selling their food. This strategy has helped them improve their Return on Equity as they were able to reduce the requirement for initial investment. Another major advantage of this strategy is that they were able reduce debts and increase the flow of income.
Net Profit Margin
Net Profit Margin is the second component of Return on Equity. Essentially, it is the amount you are able to keep from the items you are able to sell. Business industries vary because of a lot of aspects. However, most organizations function with almost similar margins. Consumers may be surprised to learn that a grocery store can only earn more than $1 from every sale of $100.
A lot of business owners lose focus on Net Profit Margin improvement. They often focus on the total sales instead of giving enough attention to the outcome. In this essence, business owners must increase profit margin rather than the total sales. This can be stated simply as one of the most vital strategies in improving Return on Investment. Your earnings are more important than your sales.
Return on Investment is truly a challenging matter to tackle. This is because the components do not agree with each other. When you decide to offer your products at low costs to increase Total Asset Turnover, you will also have to compromise the Net Profit Margin of your business.
The most effective option in this case is to sell high volumes of high margin goods. This may sound simple, but this is also quite difficult to do. However, you can still find an optimal balance between these two elements. You can maximize your Return on Investment when you are able to balance the two vital components efficiently.
Tips in Maximizing Return on Investment
1. You have to work hard in order to create a valuable perception among your customers. For instance, new luxury cars represent an excellent value as customers perceive these products to provide superior prestige and experience.
2. A high profit margin may not always be a good thing. You have to make sure that the cost of your products agrees with the standards of the business industry you belong.
3. You have to make sure that your business strategies must drive your Return on Investment decisions.
4. The most effective way to improve your Return on Investment is to improve the quality of your products or services. This way, you will be able to increase the frequency of sales, gross sales, and profit margins. You can also increase the sales retention capacity of your products or services among customers.
5. Another effective strategy is to differentiate your business from other companies. What can your company provide that other companies cannot? What can your company do well that your customers will spend on gladly?
6. You have to figure out your assets that can be liquidated in order to generate resources that can be invested efficiently.
7. One effective strategy to improve the quality of your products and services is to provide incentives. Superior-performing employees deserve additional compensation.
8. Adding new items and services to your current offers can also help improve your Return on Investment. However, you have to do this carefully in order to avoid an increase in the costs of training and brand degradation.
Entrepreneurs should be extremely focused on Return on Investment of their business. This organizational component is considered as one of the most vital aspects of every business. It determines the development and growth of an organization regardless of which industry it belongs in.