Elgin O’Hare – The Highway To Nowhere

Have you ever made big plans, started working on them, then gave up after getting started because you run out of money, time, or distractions just get the best of you?  That’s what happened to our Elgin O’Hare expressway, that goes neither to Elgin nor O’Hare.  The state ran out of funding to complete the project so the expressway is now just 5 miles long and connects Lake Street in Hanover Park to the 290/355/55 expressways after a stop light.  How do we make sure our projects don’t end like this?

1. Break your projects into the smallest pieces

An accurate estimate of your project costs can only be gotten by breaking the whole project down into it’s smallest pieces and estimating the cost for each piece.  Add up the total to get the total project cost estimate.

2. Double your estimate

To give yourself some room for the unknown, double your estimate for the cost of the project.  There is always scope creep to any project, or gotchas that catch you at the worst possible moment, so allow for additional costs.

3. Is there known risk to your project?  Double your estimate again.

If you know that there are possible risks in your projects that you can identify, you must allow for more cushion to work with.  Things don’t always work out for the best case scenario.

4. Is this a multi-year project?  You must consider inflation and capital costs.

Add in estimates for inflation and capital costs for the life of your project for multi-year projects.

5. Recalculate your return on investment given your new estimate

Is your project still worth pursuing?  Your ROI must still be in line after completing your cost estimate, otherwise you might want to abandon the idea at this point.

6. Make sure you have enough available capital to run your business

Given your estimate for project costs, will you continue to have enough capital to pay your normal expenses while implementing your project?  Are there capital risks during the life of your project?  How will you compensate for cash flow issues?  All important things to consider.

Hopefully these ideas help so that you don’t run short of funding while implementing your big project.  Do you have any other ideas that might be helpful?

More About Being A Bean Counter

Last week we talked about calculating a return on investment (ROI) from your recruiting costs, whether you are recruiting customers for your product or resellers.  Of course our return on investment calculation is just an estimate based on less than all the facts.  It is still an important calculation, though, and worth the exercise even if ultimately it is way off.  Why?  Because ultimately you want to know what your real return on investment is and you can’t wait for all the facts to come in.  So, you make an estimate based on what you believe, then you revise your number as reality sets in.

Why do you even care what return on investment is?  Return on investment is an important measurement for deciding if you time and money are being spent in the right way.  As a rule of thumb, a 20% return on investment is good for investments with substantial risks.  You can consider a business investment a substantial risk because there will be good times and bad times, and you might now be in a good time (in fact I think now is a great time).  So today your real ROI may be 20% and tomorrow it might be -5%.  So 20% is a good rule of thumb for ROI.

You might want to adjust this ROI for your risk level.  Let’s say that your ROI for new resellers is 18% but it’s likely their business will grow.  So 18% may be a very good ROI.  If your ROI is 8% instead, it might be a good ROI if your investment is US Treasuries that will always pay 8% (i.e. ultra safe).  But it would be an extremely poor ROI if your investment had any risk at all.  So risk is a factor in whether your ROI is a good number or not.

Your ROI is an important number to determine how much money you’ll need before your business begins making a profit.  For instance, you invest $100 per month for a year and your ROI is 20%, meaning you’ll make $20 per month or so.  It will take 5 years to begin making a profit if you never increase your investment.  If instead you sink your profits back into your business, you will earn $100 in revenue before hitting the 5 year mark but you’ll always lose $1200 per year.  You’ll need to back off on your investment to earn a profit.

If you do want to invest $100 per month in your business and reinvest the revenues for 5 years, how much money will you need?  $1200 per year X 5 years or $6000.  Do you have $6000 or can you get it over 5 years?  If not, you will need to borrow the money or find investors.  So the ROI is also important to determine if you’ll do it all by yourself or if you’ll need to seek help from others.  It’ll do this before you actually need the money, giving you time to work with your bank or pitching your relatives on your new business (to drum up investors).

So your return on investment number is important to estimate, then correct, as you initially grow your business.  What other calculations are important?