Return on investment (ROI) is an economic term used to measure the profitability of a business.
Return on investment is what you financially gain from the work you have done.
What can you measure return on investment on?
You can measure different ROIs within a company. An investment can for example be time or money. Some of the most common approaches are return on:
- operating capital
- investment
- invested capital
- equity
- assets
- employed capital
- invested time
Each method is providing a overview of a business’s financial performance.
The importance of measuring ROI
The reason why you should measure the ROI in your business is to see the financial gains from invested time and capital. This calculation involves dividing the profit obtained by the cost of the initial investment. For instance, if you spend $100 on Google advertising and generate a sale worth $200, your ROI would be $100, reflecting the return on your investment.
You should always measure the return of the investment. The goal of investing is to get a financial gain. It is not given that the investment has given any return, so this should always be measured.
Using ROI for evaluation and comparison
ROI can be useful in evaluating the impact of an investment, facilitating comparisons with past projects or alternative income sources within the company. This analysis provides valuable insights into the efficiency and profitability of various initiatives, this can be useful to make informed decision-making.
Different approaches to ROI calculation
Given the multifaceted nature of ROI, the calculation methods can vary. For instance, when assessing return on work done, you will have to look at time invested and associated costs. If your business has spent a lot of time on a project with low ROI, you might want to make some changes.
If you have invested money it is easier to see how much you have gotten in return then looking at factors as time invested.
It is essential to note that not all tasks or projects can be unequivocally measured in terms of ROI. Some internal activities may positively influence efficiency and employee satisfaction, yet prove challenging to quantify precisely. Reputation and goodwill is factors that can generate sales but is not easy to measure.