New interpretation of ROI: input-output ratio

Why do many companies go bankrupt after their capital chain is broken? The reason is that the founders did not fully assess the ROI of their startup in the early stages. The author of this article re-analyzes roi from two perspectives, enjoy~

Roi refers to return on investment, which those of us who work in operations should all know. Especially for those who are engaged in advertising, the most important task is to calculate the input-output ratio of advertising. For example, if the advertising budget is 10,000 yuan, how much money can be recovered after the launch? If the return is more than 10,000, we will continue to increase the advertising budget. If the return is less than 10,000, we will optimize the advertising strategy and continue testing.

Roi itself is very simple, it is a process of accounting. I recently chatted with someone who wanted to start a business, and found that the application scope of ROI is far more than just advertising. ROI can be seen everywhere in company operations, daily studies, and life growth. We are investing every moment and getting rewards every moment.

Why do many companies go bankrupt after their capital chain is broken? The reason is that the founders did not fully assess the ROI of their business in the early stages. It may take an investment of 10 million to successfully start a business. When starting a business with less than 1 million in start-up capital, the outcome of bankruptcy is already written into the agenda from the moment the company is established, but the founders cannot see it.

Here is an extended reading on roi, and a new interpretation of roi from the following two aspects:

1. Correct cognitive input-output ratio
2. Have normal operational capabilities

1. Correct understanding of input-output ratio

(1) The more funds you have, the higher the success rate of your business

I used to work for an Internet company with annual revenue of over 100 million yuan, which was considered a very successful company. What business did the company do in its early days? No business. To paraphrase my boss, I said: I didn’t know what to do at the time, so I hired people first, and then slowly figured it out after I hired them. For half a year, the company didn't make any money. Later, when it saw that others were making a lot of money from mobile advertising, it also entered the advertising field, and then it suddenly took off.

The company has not gone bankrupt even though there has been no income for more than half a year. This is because the boss was lucky enough to make his first fortune and accumulate some initial capital. If you start a company later, there won’t be any big problems even if it doesn’t open for a year. Spend a year trying various business models. Once one model works, making money will be much easier. On the other hand, if the company itself has no financial reserves and only enough to survive for three months, then there will be no subsequent advertising business, and there will be no opportunity to have an annual turnover of over 100 million yuan now.

Ordinary people save some money and rush to start a business, but most of them end up in failure because they do not have a correct understanding of the input-output ratio.

Take physical stores as an example: we only know that the capital investment to open a store is 300,000 or more, but we don’t know how much money and time it will take to break even and when income is greater than expenditure. If you pay a little attention, you can calculate the money. But there are too many factors that affect time, and it is difficult to calculate unless we use a quantum computer.

(2) It is difficult to estimate the amount of money and time required for a company to become profitable.

The annual expenditure can be calculated based on the time, number of people, material costs, and advertising budget.

But how long will it take to get your money back?

Some people make their money back in three months after opening a milk tea shop, some in three years, and some even in 30 years (if they have sufficient funds). Why is the time gap so large? The main reason is that there are too many influencing factors and they vary greatly, including the external environment, user attributes, product attributes, the cognitive level of operators, etc. Only God can see through all the factors.

How many entrepreneurs just do something without thinking it through? If you are lucky, you may catch a good time and sign a big contract, and perhaps your luck will turn around and you will be successful. What happens more often is that people fail to consider things carefully and lose as much as they invest. Look at the rows of shops with for-sale signs on the roadside and the vacant office buildings. Others can’t continue their business. Why do you think you are different and will get different results?

It's a good idea to start from the worst possible outcome and do your best. Since it is impossible to calculate how long it will take to get your money back, it is better to work harder while there is still surplus funds. No wonder startups have to work overtime so much; they are racing against the point of business bankruptcy. The external environment is changing all the time, and companies that rely on their past achievements are facing increasing pressure. Overtime work is now the main theme of companies.

(3) Different industries have different input-output ratios

I often see high cash back scams on the Internet, and I wonder what kind of business they are in that can have such a high rate of return every year. The return rate of Internet companies is very high. Once a popular APP is launched, entrepreneurs can turn from black chicken to phoenix in a few months. But the rate of return for traditional enterprises is not that high. You have to proceed step by step, and maybe after a few years, you can make a small profit.

Compare developing a mobile game to building a house and collecting rent. A game can support tens of thousands, hundreds of millions of users, and it is normal to have a monthly turnover of over 10 million. After paying back the investment in two or three months, the rest is pure profit. To build a house and collect rent, the initial investment is at least one million. After it is built, assuming that you can collect 200,000 per year, it will take 5 to 10 years to recover the cost, or even longer. As everyone is so impetuous and short-sighted at the moment, who would do a business that may take more than ten years to pay back?

When we are doing a project, we must know exactly how much money and time we need to invest, and then see if we have the ability to do it. Amazon has not collapsed after 20 years of not making a profit because it has a financial sponsor. If someone keeps investing money, even a stone can be carved into the color of a diamond. Do we have such a rich sponsor around us? I guess it happens in dreams.

2. Have normal operational capabilities

(1) Even a mountain of gold is useless to a helpless person.

The payback period of any industry has an average, such as milk tea shops, mobile advertising, e-commerce products, etc. There are many companies in this industry, and the average payback period will have a fixed value, which can be used for reference. The payback period of a milk tea shop is five to ten months. We have normal operational capabilities, which means that when the funds are sufficient to support five to ten months, the milk tea shop can make a profit through good operational capabilities.

There are two milk tea shops downstairs, both are newly opened. One is always full, the other is almost deserted. Is it that the new and old money used to open the store are different? One was issued with the new version of RMB, and the other with the old version. Or is it that the balance in the boss’ bank card is different? A boss with good business has hundreds of millions of dollars in his card, while a boss with bad business is a pauper. Neither. The only reason is the difference in operational capabilities.

Those with strong operational capabilities know how to attract traffic, build brands, and create user stickiness, while those with weak operational capabilities think that once the store is opened, there will be constant customers and they can just sit back and count the money. If we compare the two operational capabilities, will the payback periods be the same?

Jack Ma once said, it’s not that the real industry is failing, it’s that your industry is failing. The same applies here. It’s not that money is hard to make, but that it’s harder for you to make money. There is no other way except to improve your personal business capabilities.

(2) Normal operational capabilities are the basic condition for joining the game

Starting a business is like playing a game. Everyone enters the game hoping to pass the level and get the final reward. Normal operational ability requires understanding the rules of the game. If you don’t know how to play Landlord, the consequences of entering with coins are self-evident. If you start a business without the ability to run a business and don't understand the business, bankruptcy is a natural thing. If you don't go bankrupt, you can only say you are lucky.

What kind of operational capability is considered normal?

We have made similar products before and achieved success. This is the best way. If you start a business again, success will be almost within your grasp. There is a saying in operations: cross industries but not positions, cross positions but not industries. The warning to us is that once you change industries, your experience will no longer be useful. When facing a new industry, I am still a primary school student. Normal operational capabilities require us to do the same and make a profit of three months or even faster than others can do in three months.

at last

With sufficient funds, a full understanding of the industry, and the ability to get things done, if you have the above three factors, your ROI will be much higher than others whether you are starting a business, doing a project, or in life. Big projects like chips are far away from us and can be ignored. For a small project such as opening a restaurant, you must have a clear understanding of the return on investment of this industry. Otherwise, if the results are not ideal, don't complain about the unfairness of fate, just blame yourself for being stupid.

Author: Tiger

Source: Tiger Talk Operations