The financial return on investment (or ROI) refers to the financial benefits received from a specific business investment. It measures how much you get back relative to the amount you put in.
Find out how to calculate return-on-investment, the importance of it, and what challenges you might face when trying to calculate ROI.
What is Return on Investment, or ROI?
The return on investment is the measure of how efficient your investments in your business are at generating revenue.
You need to set a goal and measure your progress to make sure you are making a profit when you invest time or money in your business. Calculating the return of investment is one way to determine whether a business decision has paid off. 1
The ROI calculation can help you to understand your business’s strengths and weaknesses so that you can make improvements. It is a way to ask, “What can I make by investing my time and money in my business?”
If you outsource work, for example, to a virtual assistant (VA), does this increase your income? If so, how much? What additional income is your VA generating for every dollar spent?
How do you calculate ROI?
The ROI is often expressed as a percentage or ratio. It is calculated by multiplying the net gain or benefit from the investment by its cost.
How ROI works
If you spend $1,000 per month on pay-per-click (PPC), advertising, and make $2,000 in revenue directly from the campaign you would divide the profits ($2,000 – $1,000 = $1,000) by your cost ($1,000). This will give you a 1/1 return on investment. To get 100%, multiply 100. This means that for every dollar spent on PPC ads you made a dollar in profits.
If you spent $1,000 per month on this campaign and instead made $1,200 in sales your profits would be $200 (1,200-1,200) and your ROI $200 (profits x $1,000 = 0.20 or 20%). This means that for every dollar you spend on this PPC campaign, 20 cents would be earned.
Consider the return on investment of any expense. What will a faster, new computer do for your business? Is it possible to make more money if you have a virtual assistant? These calculations will help you choose investments that improve your bottom line.
Time and ROI
Although ROI is usually associated with financial investments, it’s worth considering your time as an investment. Your ROI is 3,000/240 or 12.5. This means that for every hour of work, you only earn $12.50.
You can identify your return on investment and make adjustments to your business model to increase your revenue in a shorter time.
Limitations to ROI
How well your revenues (or what you earn) can be linked to a particular investment is the problem with calculating ROI. You may not be able to determine the exact amount of an increase in revenues if you use SEO. This is because there are other factors, such as. Increased traffic may also be a result of social media. Although it can be difficult to track social media’s impact, there are tools that can help. Facebook provides insights, and many social media management tools provide analytics. It can be hard to determine if clicks on social media lead to sales.
In most cases, clients and customers don’t spend any money the first time they meet you. Maybe they found you via a PPC ad. Then they follow you on social and sign up for your email list. And then they buy. Which lead to the sale? Although you could argue that the PPC was responsible for introducing the prospect to your attention, it is possible that a social media post or email resulted in the actual sale.
You can use this information to calculate ROI. Free marketing is often a personal investment of your time. If you know that your time is worth $50 per hour and you spend one hour a week on Instagram, then you can divide your income from social media by $50 (if that is possible). You would use the above example to calculate your ROI. The net benefit is $1,000 in sales, plus $50 per hour = $950. Divide $950 by 50 to get an ROI of 19.0 or 1900%. This is a great return on investment.