Return on investment (ROI) is an economic term for the profitability of an investment.
Your return on investment is your financial gain from something you’ve invested.
How to work out the ROI
Let’s say you start a small business selling handmade candles. You invest around $1 000 to set up a website and buy some supplies. You make $1 500 in revenue the first couple of months.
Your profit is your revenue of $1 500 minus your initial investment of $1 000 = $500.
To work out your ROI, you take your profit divided by initial investment times a hundred:
500 / 1000 x 100 = 50%
In this case your ROI is 50%. This means that for every dollar you invested in your business, you made a profit of 50 cents. Having a positive ROI means that your investment was successful and that you earnt more than you put in.
The way you calculate ROI can vary depending on what the investment is. For example, when assessing the return on work you’ve done, you’ll have to look at how much time you invested and the associated costs. If your business has spent a lot of time on a project with low ROI, you might want to make some changes.
Why it’s important to measure the return on investment
The reason why you should measure the ROI in your business is to see what—if anything—you gain from the time and capital you’ve invested. It’s not a given that an investment will earn you money. If your business overall doesn’t have a positive ROI, you should consider making some changes.
Knowing the ROI of different projects, businesses or assets is useful in evaluating the impact of an investment, and means that you can know what’s giving you the highest return, and where you should focus your attention.
It is essential to note that not all tasks or projects can be measured in terms of ROI. Some internal activities may positively influence efficiency and employee satisfaction, yet be hard to quantify precisely. A good reputation is an asset that can generate sales, but it’s not easy to measure the ROI on your reputation.