Episode 169 - How to Figure ROI

Custom Apparel Startups

Those letters - ROI - are thrown around a lot in almost every business.

Technically, it's Return on Investment - but just what does that really mean?

What is an ROI?

When you put money into a business endeavor, ROI helps you understand how much profit your investment has earned. Looking at potential ROI numbers, and going back to review them over time helps you to make solid business investments.

So WHY should you care? Why figure out ROI at all?

Businesses look at ROI a few different ways, and they're all helpful in figuring how profitable your business might be based on how much money the equipment cost.

ROI - How long will it take to make in profits what your equipment cost you?

• For example : let's say you bought at $10,000 t-shirt transfer printer
• And you project you'll make $10 for every shirt you sell using it
• Sell 200 shirts per month and you'll make $2,000, which means your machine is "paid back" in 5 months
• Sell 500 shirts per month and it's paid back in 2.

If the expected life of the printer is 5 years and it pays for itself in 5 months - that's a great investment! Because that's 55 months of owning the equipment outright and making $2K per month. You spend $10K and make $110K.

The number everyone is seeking is the net return: I want to make $$$$ to put in my pocket. That is your net return.

In other words, if you spend money on something, how much could it potentially make you in profits?

The Financing ROI

This is how you might do some math when you are financing your equipment. One of the concerns people have is "this machine costs $X a month, is this something profitable or something I can afford?"

Let's do the math above, but talk about payments

Payment = $300 / month
Sales = 100 shirts a month
Profit = $10 per shirt

Net Profit is $1000 a month - $300 payment = $700 net, or $8-9k a year. And that's running a machine for maybe a day or two a month!

One could say if you sell 30 shirts a month you can "afford" a payment

What is a Net Return? (for comparative investment costs)

A net return is the investment's return after costs.

You purchase a $10,000 machine and sell 1000 shirts a month for $20 each. That is $20000 a month. If you run the machine for 5 years that is $1,200,000 in revenue.

However, that is not your NET return. Your net return should deduct costs like:

• Cost of printer
• Cost of shirt
• Cost of supplies for each shirt
• Cost of doing business (state fees, credit card fees, website
• etc.

So the net return above would be more like:

$1,200,000 Revenue
- $10,000 machine
- $600,000 in shirts/supplies (at $10 per shirt for shirt, ink, etc)
- $5,000 in business fees (yearly cost to do taxes, register with state, etc)
- $30,000 in credit card fees
= $555,000 Profit

Now of course this is SIMPLE math and there are other fees to consider, or your costs could be much less, or profit much more. It's important to consider these numbers as you make plans, goals. etc.

How to calculate a SIMPLE ROI when determining your next business investment? or your first investment? In other words, are you considering buying your first machine or an additional machine? You will need:

• Cost of Equipment
• Estimated profit per piece
• Estimated number of sales
• Estimated cost to run equipment
• Estimated life of equipment

Once you have some of these numbers, you can crunch them to determine what your potential ROI is, and make a choice if its the right decision for your business.

So you are thinking, "Do i want to buy an embroidery machine, or a DTG printer?"

Embroidery:

Cost of Equipment - $10,000
Estimated profit per piece - $15
Estimated life of equipment - 10 years
Estimated sales - 40,000 units (4 pieces per hour, 4 hours a day, 20 days a month, 10 years)
$15 profit x 40,000 units = $600,000 or $60,000 per year

DTG:

Cost of Equipment - $15,000
Estimated profit per piece - $15
Estimated life of equipment - 5 years
Estimated sales - 55,000 units (12 pieces per hour, 4 hours a day, 20 days a month, 5 years)
$15 profit x 55,000 units = $825,000 or 165k a year

In this example we can see how the DTG printer is a better business based on how THIS business operates.

Here is a COMPLETELY different example, same machines.

This business might have a lot of customers willing to buy high end shirts, and SOME customers wanting to purchase embroidery.

Embroidery:

Cost of Equipment - $10,000
Estimated profit per piece - $100
Estimated life of equipment - 10 years
Estimated sales - 12,000 units (4 pieces a day, 25 days a month, 10 years)
$100 profit x 12,000 units = $1,200,000 or $120,000 a year

DTG:

Cost of Equipment - $15,000
Estimated profit per piece - $10
Estimated life of equipment - 5 years
Estimated sales - 40,000 units (8 pieces per hour, 4 hours a day, 20 days a month, 5 years)
$10 profit x 40,000 units = $400,000 or 80k a year

In this case the business should go with the embroidery machine. They are more likely to sell high-end expensive embroidery, compared to their customer base not really being interested as much in high end shirts, and not near the volume.

Further... this business owner might say LET'S DO BOTH!

Another Example:

You invest $10,000 in a business. This could be a printer, supplies, etc.

After one year this business grosses $50,000.

Your Net Return = $50,000 (Gross Return from investment) - $10,000 (initial investment) = $40,000 Net Return.

Then $40,000 (Net) / 10,000 (Initial) = 4 x 100 = a 400% Return on Investment.

This was an amazing investment for your business, especially considering it's not just a one year return, but this equipment could be 3, 4, 5, or more years in return.