For most business owners, their company is their largest single investment. Most owners used a big percentage of their personal savings or took out second mortgages on their homes to purchase or start their business. What's amazing is that many of these owners, who will move savings accounts and Certificates of Deposit from one bank to another just to get another quarter percentage point in interest rate, never look at the rate of return generated by their biggest single investment - their business.

To calculate your return on investment, you need to know two things - your return and your investment. (Thank you for stating the obvious.) You're welcome. Let's look at return first. In the classical sense, return is your net profit before taxes. For small, owner-operated businesses, return is net profit before taxes plus the owner's salary minus the salary that would have to be paid to a professional manager who would replace the owner. This adjustment needs to be made because some owners take very high salaries while others take almost nothing out of the business. We need to recast the return figure to get an accurate number for the real earnings of the business. Let's say your business made $5,000 in profit last year and you took only $12,000 in salary. You would have had to pay a professional manager $50,000 to operate your business. Therefore, your business really lost $33,000 last year ($5,000 + $12,000 - $50,000 = $-33,000). Suppose your business made $25,000 in profit last year and you took $115,000 in salary, and you would have had to pay a professional manager $80,000 to run your business. In this case, your business really made a $70,000 profit last year ($25,000 + $115,000 - $80,000 = $70,000).How much would a professional manager get to run a business like yours? It depends on the business. For a small retail store, it might be less than $30,000; for a multi-million dollar, high technology company, it might be well over $100,000. Ask your banker, your business adviser or your accountant. They know enough about your specific business to give you a narrower range.

Now that we've looked at return, we need to look at investment. To me, investment usually represents Total Assets. In the Assets and Liabilities portion of your financial statement, you'll see Total Assets listed. That's what you should use. Some people have used Net Assets (Total Assets minus Total Liabilities) to calculate return, but that's more a measure of leverage or how much money you've borrowed. If you're a marginally profitable company but have borrowed a lot of money, you may have a very high RONA (Return On Net Assets) percentage. For example, if you own a business with $20,000 in Total Assets and you owe your bank and your suppliers $19,000, your Net Assets are only $1,000. Suppose your business made a profit of only $600 last year. Your annual Return On Total Assets (ROTA) is, therefore, only 3% ($600 profit divided by $20,000 Total Assets), but your annual Return On Net Assets (RONA) is 60 percent ($600 profit ÷ $1,000 Net Assets)! That 60 percent RONA will give you a false sense of comfort (Hey! I'm makin' 60 percent per year return on my money! Wheeeee!) when you're really almost broke! We want to look at Return On Total Assets (ROTA). It's a more realistic gauge for most small businesses.

If you can get a one-year, federally-insured bank CD paying over five percent, why shouldn't you expect a far higher annual return from your uninsured and far riskier small business? You should. Big businesses that are uninsured but far more stable than your small business, return about 15 percent. (The Standard and Poor's Stock Index of the 500 largest, publicly-held companies has returned over 12 percent per year over the last 15 years. Since 1925, it has returned over 10 percent per year.) Look for returns (ROTAs) for your own business of much more than 15 percent. Twelve years ago, my then-small manufacturing business had a ROTA of over 20 percent. What's your ROTA? Go measure it!

What do you do if your ROTA isn't as good as it should be? Two things. Improve your profitability and make your assets work harder. Most business owners know lots of ways to increase profits. They think about profits (or lack of them) all the time. They don't think so much about making their business assets work better for them. Here are some ideas:

If you own a restaurant, buy used equipment for the kitchen. It's plentiful, economical and most kitchen equipment lasts a long time. Spend your money where your customers can see it – comfortable seating and nice decor.

Defer capital purchases for as long as you can. If you don't need it; don't buy it. Can you fix up that old truck and repaint it? Perhaps that will buy you a few more years of service before you have to replace it with a new or newer vehicle.

Buy a refurbished mannequin for your store at a cost of $180 instead of a new one for $700. Look at used cash registers before you buy a new one. People come into your store because you have good merchandise, enticing decor, or well done ads, not because you have a new cash register!

Does somebody want to sell you their existing business? Do they want to sell out for cash? Better make sure the money you invest in buying them out gives you a good return on your purchase. Run those ROTA numbers before you buy.

Before you buy a piece of equipment for $10,000, calculate the payback on it. How soon can it generate $10,000 worth of gross profit ? Two months? Buy it! Two years? Forget it! One year? Maybe.

Machinery salespeople used to call on our business trying to sell us a numerically-controlled router. "You better get one," they said, "All of your competitors have one." We certainly did a lot of routed shapes - 53,000 per year. But given our efficient labor force and the $150,000 router cost, we couldn't justify it as a purchase – the numbers just didn't work out. The folks who bought our business now have a numerically-controlled router but they're doing more than twice as much volume as we were and they acquired a used one! If you can't justify it, don't buy it!

Make a rule starting today – don't buy any more assets unless you can put them to work in your business immediately and they pay for themselves quickly. Improve your return on your assets. Set a goal of 20 percent per year within two years and work toward it. Your business will improve and you'll be making your business far more attractive and valuable to a prospective purchaser should you ever decide to sell it.