How to calculate ROI (Return on Investment)
The crucial part of any business is to know you are making money, right? And it’s even more important to know that your investments are paying off. In order to know that, you need to know how to calculate your return on investment (ROI). In this article, we’re going to be covering exactly what ROI is and how you formulate it.
If you’ve made it past paragraph one and you’re unaware of what ROI is then it’s definitely better that you keep reading. But also, if you’re acutely aware and you’re looking for a new system to help you understand the ROI of your business better then also continue scrolling.
It’s easy to see that a great ERP system will no doubt provide you with the best results and offer you an unmatched set of applications that can reduce the workload and calculation, tenfold. But as always, without the knowledge of how to do it, you’re left powerless to the ways of technology.
What is ROI?
It’s best that we cover the basics, the definition and just how you can calculate it – just in case, you know, technology stops once and for all. The term return on investment refers to the value that follows directly from a specific marketing action, essentially it’s an indication of whether a marketing effort has been profitable or not, and how profitable it has or hasn’t been.
ROI generally puts everything into monetary terms, and calculates how much money is earned from the money that has been invested. But should it take into account the time and effort you put into it? Yes. However, as they are not considered tangible values, there’s no such formula to calculate their worth.
How to calculate it
You will be surprised to know that calculating ROI is much simpler than you think, there’s no crazy E=MC2 equations, or any complex excel sums that you need to come up with. The formula that’s used is a pretty generic, yet effective one.
ROI is obtained by taking a look at what income you have achieved, subtracting the investment, and once you work out the result, you divide it again by the investment. Basically, this;
ROI = INCOME – INVESTMENT / INVESTMENT
The result will give you a percentage that will help you understand if your benefits are small, large or if you’re at a loss.
Still need some work on the calculations? Let’s take a glimpse at an example I’ve so kindly plucked from thin air. Take an e-commerce online store that has decided to analyse two marketing projects, both with different investments and projections.
Initial investment is £10,000, which should result in a projected £35,000 profit.
Initial investment is £15,000, which foresees that a profit of £50,000 is projected.
Which do you think will be more profitable for the business? You’ll be able to work out the answer by calculating the return on investment by using the formula found above.
Case one result
35,000 (profit) – 10,000 (investment) / 10,000 (investment) = 34.9%
Case two result
50,000 (profit) – 15,000 (investment) / 15,000 (investment) = 49.9%
It’s clear to see that case two is more profitable because it has a much better return on investment. And there you have it, no more tricks or wizardry, just a straight up formula that helps you when you’re analysing your company’s performance and investments.
Can all of this be made easier for you by choosing a fantastic ERP system? Yes. Alongside this, you can manage your sales, finance, operations, and human resources in one beautiful platform.