A business is only as profitable as its return on investment, there are no two ways about it. If you look at the progression of any business, an initial investment is made with a roadmap in sight, and after going through its due process, an investment is meant to mature and yield positive results.
The profit gained from an initial investment is known as its Return on Investment or ROI. To establish a business and generate profit, it is important that you keep a close eye on the revenue that is generated from your investments.
Moreover, as your business grows, the need to invest more does too. This will mean that the amount of investment you make in your business must give you returns as well. It should be a widespread practice for you as a business owner to track your investments and properly monitor their results. To do that, there are systems in place that can help you measure your ROI effectively and keep track of the progress made on your investments.
How to Calculate Your ROI Effectively?
One of the most effective methods to keep track of your AR is to employ an accounts receivable ROI calculator. You will find easy-to-use programs that can help you calculate your ROI but with some AR collection software, you will also have the features built in. To calculate your ROI, you can follow a simple formula and stay on top of your AR progress. This is how you can implement the formula:
ROI (Return on Investment) = (Net Profit from Accounts Receivables / Investment in Accounts Receivables) x 100
This is how you can break down the different components of this formula:
- Net Profit from Accounts Receivables:
This constitutes the total profit generated from the money you have invested in your accounts receivable. - To calculate this, you need to consider the revenue generated from accounts receivable and subtract any associated costs, such as severe debt expenses, interest expenses, and collection costs.
- To calculate the net profit from accounts receivables, you can use the following formula:
Net Profit from Accounts Receivables = (Revenue from Accounts Receivables – Costs from Accounts Receivables)
Another aspect that you would have to consider is the initial investment that has been made in your accounts receivable. This will determine the starting point of where your money has been put.
- Investment in Accounts Receivables:
This represents the total amount of money tied up in accounts receivables, it reflects the sum of the payment you have made to manage your accounts receivables.
- You take the average of the beginning and ending accounts receivable balances to get a more accurate representation of the funds invested over a specific period. Here is the formula to help you calculate this:
Investment in Accounts Receivables = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
What Comes Next?
Once you have calculated both the Net Profit from Accounts Receivables and the Investment in Accounts Receivables, you can use these values in the ROI formula to determine the ROI percentage.
If you would like to understand the implications of this formula here is an example:
Let us say a company had $500,000 in accounts receivable at the beginning of the year, $600,000 at the end of the year, and generated $1,200,000 in revenue from accounts receivable during the year. The costs associated with managing accounts receivable, including severe debt expenses and collection costs, amounted to $100,000.
- Investment in Accounts Receivables = ($500,000 + $600,000) / 2 = $550,000
- Net Profit from Accounts Receivables = ($1,200,000 – $100,000) = $1,100,000
Now, plug these values into the ROI formula:
ROI = ($1,100,000 / $550,000) x 100 = 200%
In this example, the ROI for accounts receivable is 200%, indicating that for every dollar you have invested in accounts receivable, the company generated a 200% return in net profit. Understanding the effectiveness of your AR and the outcome of your investment can be a useful tool in assessing the real-time effects of the investment and your potency as a business to extend credit to customers.
Creating Ease in Calculating ROI Through Your AR Software
If you are struggling to accurately assess the ROI for your business, there are myriad ways to ensure you can view the results without having to take on the hassle yourself. Rather than leaving this calculation to a bunch of people who can crunch the numbers for you, your business will benefit from the automation of this entire process. That is why you should explore investing in accounts receivable software, preferably with an ROI calculator built in. This way, you can have immediate and continuous access to your ROI whenever you like.
When looking for an accounts receivable software ROI calculator, you can access multiple sources online that can provide you the help. But would it not be a favorable circumstance if your collections, and the initial investment, are presented to you in a format that is easy to access, understand, and assess at your discretion? That is something that certain accounts receivable software can do for you, which enhances customer experience by building trust for the investor.
Last Demand is one such platform that has not only helped streamline all the processes involved with AR but has also made life easier for investors to assess and track their investments in real-time. One prominent feature of this software is complete transparency for its users, especially when it comes to revealing the money trail and its returns.
Within Last Demand you do not need to seek out various ROI calculators, as the software allows you to access a dashboard, a client portal if you will, that displays the main component of your spending, the revenue recovered from the accounts you have uploaded.
The software facilitates proper record keeping, so you can omit the need for bookkeeping or manual processing to assess generated revenue. The portal dashboard shows you the money recovered from the number of accounts and the overall recovery rates. This is visual evidence that your investment is paying off, which assists the need to calculate numbers and figure out the return on investment.
For someone who will initially struggle with understanding how much money has been recovered against the effort put in, this feature makes it easy for a user to determine that. By accessing this information, one can easily calculate their ROI and regularly assess the fruitfulness of their investment. Your business requires tools and assistance to help it grow and continue to generate value and when that value is measured through ROI – you can use all the help you can get!
