ROI (return on investment) is a popular measure of investment performance, efficiency or profitability that's essential for the long-term success of a business. An ROI calculation involves a simple formula that can be used to evaluate your investment in your business overall or in components of your business, such as marketing campaigns. By calculating and monitoring ROI, you can make informed decisions in terms of choosing between various investments, ending investments, and increasing or decreasing investment amounts.
Return on Investment Calculation
In the simplest terms, ROI can be calculated with the following mathematical expression: ROI = (profit - investment) / (investment). To present your business' return on investment as a percentage, you would just need to take the calculated number and multiply it by 100. In the formula, "profit" refers to payback or how much your company gains or benefits from the investment while "investment" refers to the cost or amount you invested in the business, project or marketing strategy. Both variables need to be expressed in terms of money, even when considering factors such as investment of resources and time, which need to be translated into dollar amounts. To avoid misinterpretation and facilitate future recalculations, keep close track of what inputs are used to calculate profit and investment
ROI Calculation Guidelines
A single snapshot of ROI doesn't communicate much about your investment. Instead, focus on how ROI improves or worsens over time. Start with a baseline ROI calculation of current investment efficiency and then compare this to monthly and yearly ROI calculations to observe how ROI changes. If your company's financial return on investment becomes positive and remains positive, there's good factual evidence that your investment is worthwhile. If you're faced with a consistently negative ROI, some changes need to be made or the investment you're measuring isn't a wise one. You can also use ROI calculations to compare different investments and help you identify which is more profitable.
Effective ROI Calculations
ROI is often confused with profit and profit is further misunderstood as revenue. The total amount of revenue you've made doesn't speak much to investment performance unless you take into account both the initial investment amount (which is worked into the above equation) and the costs involved. "Profit" or payback is calculated as the revenue subtracted by the cost of the products or services you sold, such as the costs of materials, labor and shipping. Additionally, many small business owners fail to take into account their own time as part of their investment. This can be calculated as minimum wage multiplied by the number of hours spent on the business. Make sure these important variables are included for the most accurate ROI calculations.
About the Author
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