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Small Business Investing

Rois and Small Businesses

What are some limitations to ROI analysis?

As with many metrics used by businesses to analyze their success, each metric does have its limitations. With ROI, especially forward-looking projections of possible returns, you must make accurate assumptions. When you want to use ROI accurately, you should be careful not to overstate the income generated by the idea, or understate the expenses related to the idea. Businesses also may not capture all sources of expense, or all future sources of income. Businesses also typically overstate the time frame needed to generate the return, and may understate the amount of time needed to actually implement the idea so that it may begin to generate a return, so it is prudent to estimate this time accurately. If your assumptions and numbers are accurate, you can see if the possible return justifies the investment. ROI calculations also do not take into consideration the risk inherent in the idea or investment. When a company considers several options, it may include a probabilistic factor for the assumptions, such as a 90% chance of hitting the revenue targets if the idea is implemented.



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