“What is an ROI calculator?” I hear you asking. “ROI” simply stands for “Return on Investment”. An “ROI Calculator” is just a tool that outlines the cost of something and generates what your anticipated profit will be over a certain length of time. Usually annually.
We should make a distinction between a simple ROI calculator (i.e. a widget built into a website with limited inputs), and a financial plan (complete with P&L, cashflow, and balance sheets). Both are going to try and do the same thing, but one is going to be far more detailed and accurate.
Roughly what we’re going to be talking about is a return on investment for your whole business, but return on investment can (and should) be used for lots of different aspects to your business to help you determine how best to spend your company’s money. Usually, though, that’s going to require a lot of detail that a simple widget can’t provide.
How do ROI calculators work?
You put inputs in one end and those should generate a timeline of profits on the other side. For anyone versed in economics, please wait patiently while the rest of us play catch up.
For example, using simple numbers, if you buy a “Bazooka Joe T-Shirt Cannon” for $1,000 and you rent it out for $50 to other Bazooka Joe/t-shirt canon enthusiasts, you’ll have to rent it out 20 times just to break even. If you’re renting it out once a week, you can see that within the first year your ROI should be 160% of the initial investment. “But wait, what about the cost of t-shirts in this cannon? Or the taxes on these profits? Or maintenance? Or storage?” Enough questions and you can see that this poorly cobbled together metaphor faces some serious issues. But it also illustrates some of the dangers of ROI calculators in general.
These calculators are easy to understand, but the same simplicity that makes them accessible can cause a false sense of security about a very complex business.
Who uses ROI calculators?
Where you’re going to see most ROI calculators in action is from service or equipment providers. Most of them will have just a few variables for you to input into a form on a website and then they’ll calculate a rough idea of what kind of dollars their offerings can generate based on that. It should be noted that a simple calculation with limited inputs isn’t going to have much use outside of getting a very general idea of what investing in their offerings can do.
Okay. You mentioned financial plans before. What about those?
Financial plans are quite a bit different and this can cause some confusion. While an ROI calculator tries to draw a parallel between a single product and its rate of return, a good financial plan will lay out all of your finances to as much detail as you can provide.
You’re going to get asked for these almost exclusively from bankers writing loans and investors looking to put their money into your center.
What are some limitations of ROI calculators?
This is a tricky question because not all ROI calculators are built the same. There are lots of them out there, and many companies will give away ROI calculators to help speed along the process of estimating a return on running different amounts of floats.
The problem is that these calculators are generally pretty simple and don’t account for a lot of complex variables that are involved in figuring out a proper Return on Investment. If there’s only five or six inputs, you’re not likely to get an accurate model of your costs. And if there’s only one or two…
Ideally, you should have something that incorporates every major cost associated with your business. As a small example, changing how much you pay your employees by just a dollar or two per hour can be the difference between turning a profit or taking a serious loss. Likewise, If you can’t account for things like float tank maintenance or salt damage, you’re not going to have an accurate expectation of your future financial obligation.
This is where financial plans come in. The closer you get to inputting every single cost associated with your center, the better understanding you’re going to have on the process. As you do this, you’re establishing the building blocks for your profit & loss, cashflow, and balance sheets. In other words, you’re actually creating a fully realized financial plan.
Okay, I get it. I need a financial plan. But what good are they really?
Financial planning ends up being like most things in life: you get what you put into it. If you take a simple widget, input a few variables, and blindly trust what it shoots out, it’s probably not going to be extremely useful for you. Conversely, if you meticulously lay out all your expenses, set realistic expectations for growth, and plan ahead, a financial plan can be an invaluable tool in your decisions for everything from pricing to staffing to hours of operation, and more.
A good way to approach a financial plan is not as a prediction of the future, but as a reference for how your float center will perform when things are going well and when sales are lean. How successful will you be if your center only operates at 30% capacity for six months or a year? Can you still cover your expenses? Plot your financials from years one through five as “worst case” to “best case” scenarios for performance (and everything in between).
It’s important to treat financial plans as living documents. Even after you get funding, these tools can help you be forward thinking. If after a few years in business, you may be able to see that with current expenses, you’ll be in the red in six months to a year, you have the time to proactively do something about it. You can adjust your marketing strategy, manage your payroll more closely, or maybe hold off on purchasing that new binaural beats machine for your post float lounge.
If you want to get a leg up on securing funding for your center, check out our Float Center Business Plan. It includes a fully customizable financial plan with hundreds of variables going into equations that automatically calculate and produce 5 years worth of P&L, Cashflow, and Balance Sheet numbers. It can help you manage your expenses and expectations throughout your float journey (and allow you to officially ditch that general ROI calculator by the wayside).