What is return on investment calculation

Calculating the return on investment for internet business has many drawbacks. Since the burst of the dot com bubble in the year two thousand, with its many promises, investors are being very careful when it comes to putting their money in such online businesses. The foreign exchange is mostly traded on line so it can be said to be an internet business. Calculating the return on investment on internet business has it peculiar difficulty as there are hidden risks and uncertainties that may not be taken into account until they manifest later. We will explore all these in the article and make it easier for the reader to arrive at a better way of calculating return on investment for such businesses.

  • WHAT IS RETURN ON INVESTMENT?

Simply put, it refers to the benefit or gains minus the cost or input all divided by the cost. It is expressed in percentage.

The input has to do with virtually everything that goes into the production of good or service such as hardware, software, internet subscription, consultants and anything money was spent on the business. What does this definition imply? That if an investment has a return on investment of 100% it means it will yield twice the amount of money invested on it.

  • LIMITATIONS

Calculating the return on investment for an internet business looks like one straight forward job as we have seen from the definition. But nothing can be far from the truth. In fact even when it is expertly done, there are inherent limitations that can make it misleading and not give the actual return on investment as intended. What are some of these factors?

  • ASSUMPTION ABOUT THE COST

There is no way we can be say with complete certainty how much a business will cost to run until we have started operating it. The problem is compounded when we look at intangible things, how do one for example, place a value on business connections, without which a business may never see the light of day.

  • QUANTIFYING RISKS

Business involves risks, both cannot be separated. And the amount of risk is a form of cost on the business. It represents part of an intangible expense and there is always a challenge of factoring it in to the calculations of return on investment.

  • COSTING INVESTED TIME

Most workers earn money by exchanging time for it. This show that time is an intangible commodity that can be traded for cash. It therefore means that it should be taken account when calculating the return on investment. And when the time input is neglected it gives erroneous results as time is definitely not free. The cost is the alternative foregone, but how do we measure that in monetary terms?

The return on investment for internet business   may not demand the time it takes to prepare that for fields like real estate but it must be thoroughly done since it is used to justify an investment otherwise it will mislead both the entrepreneurs and investors.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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