Investing in an automatic packaging machine to boost your business is good. However, how do you predict the profit or risk in this investment? This article will let you know how to calculate the ROI for your investment in an automatic packaging machine and make it clear.
If you are thinking of buying a packaging machine, cost savings may matter. The extra benefit your business will gain outweighs other considerations. Try to base your factors on the following:
- Check the total cost of machine investment
- Knowing how it can save labor costs during production.
- The increase in productivity
- Annual Expenditure of Your Packaging Business
- The timeframe for recovering costs spent.
The above factors are the highlight most experienced investors pay attention to. Especially before buying a new machine. Also, judging by customers’ feedback at Spack machines. Investing in an automatic packaging machine is always a profitable venture.
You may want to know if it’s worth it in the long run. Well, before purchasing an automatic machine, get proper insights. Calculating return on investment is your best bet.
Here is a simple formula on how to go about it.
Do note that ROI means Return on Investment. It is the profit you make from any capital you invest in a business.
Return on investment (ROI)= Net profit generated by new machine / Total cost of machine investment x 100%
This formula provides a basic analysis of any investment you make in your business.
For instance, if you invest $40,000 in a new packaging machine. And, you intend to generate $50,000 as net revenue from the packaging machine per year. Your ROI analysis will be:
$50,000 / 40,000 X 100 = 125%
Your ROI is 125% in this case.
While all the stages in production may not need automation. The actions that need many people and repetition need automation.
Before you buy an automatic packaging machine, knowing the ROI is crucial. According to marketing specialist Tim, from Harvard Business School. Knowing the ROI of any business venture you intend to go into will help you. It will enable you to know if the project is worth executing or not.
Using the calculation above, estimate your ROI. Once you can prove your return on investment, achieving success will be an easy fit.
You may want to calculate other things that may have an impact on the decisions you make. All in all, do note that the most important of them all is the entire ROI analysis. It usually includes capital expenditure and your expected net profit/loss.
We have simplified the process of calculating ROI. It is for easy analysis before you buy a packaging machine.
How To Calculate the ROI of an Automatic Packaging Machine?
Calculate Total cost of machine investment
Calculating the cost of packaging with a machine differs. You have to include the following:
- Machine cost
- Training fee
- Shipping cost
- Tax fee for importation
- Maintenance fee
To sum this up, we have an in-depth guide that explains what it entails in detail. Also, our Spack Machine experts can provide accurate details about the cost.
Calculate the Net profit generated by the new machine:
1. Labor Cost Difference
The determinants of your ROI revolves around the estimation of these numbers:
A. Your current labor cost for the packaging process without the machine.
B. The estimated labor cost with an automatic packaging solution.
Below is a careful analysis of how the differences matter. The difference between the two numbers can inform your investment in the packaging machine.
Cost of Current Labor Without a Machine
For starters, you need to calculate the average labor cost of your packaging process without a machine. This includes salary, the worker’s insurance, paid vacation if any. Including other costs of keeping workers in a company.
Cost of packaging process using an automatic packaging machine
Even though the initial cost of an automated machine is capital intensive. The requirements for running it are minimal when compared to the manual human process. What requires many people to achieve repetitively. An automatic machine will need a lower number of human labor.
For instance, if the manual packaging progress need 4 laborers, and the average labor cost is $19,000/person/year, The total labor cost for packaging progress will be 4*$19,000=$76,000
And in the automatic packaging solution, you will only need 1 or 2 workers to operate the machine. Assuming here we need two workers to work with the machine.
To get your labor cost difference, subtract $38,000 from the $76,000 of the current labor cost.
So A – B= $38,000
$38,000 is your labor cost difference.
But, the reverse may be the case, sometime a packaging solution may need a few workers to operate, but whether it’s a profit or an all-expense, do take note of the number.
2. Annual Gross Profit difference
C. To get the annual gross profit, first, take note of the number of packages you currently produce and the profit for each pack. Check the annual profit that makes from the packaging progress without a packaging machine.
D. Next, Check the capacity of a new automatic packaging solution. Feel free to contact the Spack machine experts for a consultation. Usually, the capacity for a single-line packaging solution is about 1,200-4,200 bags per hour, and it can be double or even more with a multi-line machine.
With the estimated capacity of the automatic packing solution and the profit for each package of your product, you can easily calculate the annual gross profit with the automatic solution.
Annual gross profit difference= D-C
3. Annual Expenditure of Your Packaging Business
This is also in two forms which are
E. The expenses you make include production loss rate and remodeling. Including your loss on the unqualified package because of the substandard seal or weight, also, we need to consider what it takes to run the current packaging line without a machine.
F. This entails the expenditure you incur while using an automatic packaging machine.
It includes the cost of integration and running of your new packaging machine. To get this subtract the cost of number F from number E.
E – F = annual expenditure of your packaging business
Analysis of Return on Investment Calculation
Assuming After adding labor cost difference, annual gross profit, annual expenditure of your packaging business is $50,000, and the cost of a new packaging machine is $40,000. This is the stage to apply the Return on Investment formula.
Your ROI will be: $50,000 / $40,000 X 100 = 125%.
This is not all there is to Return on investment calculation. You may want to know your ROI timeframe or if investing in a new packaging machine is worth it in the long run.
How to Calculate Payback Period of an Investment
The payback period is the timeframe the packaging machine suppose to pay itself. For any investment one makes, recouping the capital is a valid expectation.
The known payback formula for equipment cost in any business is:
New machine cost / total periodic profit the new machine gains
For instance, if a new machine is $40,000
And its net annual profit is $50,000
The payback time will be:
$40,000 / $50,000 = 0.8 years
In this case, your PBP is 0.8 years.
How to Analyze Your ROI Results
Upon calculating your ROI and interpreting your results using the above formula. Pay attention to the following points to enable you to know if it’s a profitable venture it not.
After the ROI calculation and checking the present state of your business. Is it profitable to buy the machine?
Look out for the machine that will maximize profit
Will the new machine bring profit? Also, what loss will you get if you don’t automate your packaging?
At Spack machines, contact our experts can help answer further questions if you need clarity. Whether it’s on a new packaging machine or improving your current packaging method.