Return on Investment
Return on investment, or ROI, measures the value of your investment against generated gains or losses. The reason it’s important to know your ROI is so you can make budget decisions based on actual earnings.
How to Calculate ROI
Calculating ROI is one of the easiest formulas out there and one of the most popular profitability ratios. While you may like how flexible the formula is, any expert will tell you that calculating ROI can get complicated. That’s because the definition of “investment” is pliable, depending on what your goal is.
ROI = (Net Profit / Cost of Investment) x 100
Certainly a business can look at every penny invested in their company, from overhead to freelance payroll, and cost of supplies and equipment. But for larger companies, it can be more helpful to look at smaller bits, like the ROI for a specific marketing campaign or on an entire department.
What you Need to Know About ROI
The following is one example of how complicated it can get to formulate the ROI for a marketing campaign.
You calculate the amount spent on everything from employee labor hours to cost of supplies and equipment. But remember, you probably have one or two—or more—departments working on the marketing campaign. So in addition to including the amount workers are paid, you also have to consider what portion of your overhead goes to support the campaign, including the office furniture employees sit on to the equipment they use to do their jobs, and any additional funds the company pays to support employees in relevant departments, like if they need transportation to or from work sites or meals supplied to those working on the campaign.
You also want to be sure you’re calculating the costs just for the duration of the project, which can mean from inception to launch or perhaps there’s a lull after production wraps and when the project launches.
So even saying that it’s complicated to calculate ROI is an understatement.
Why you Should Calculate ROI
Calculating your company’s ROI will help you determine how far you have to go to achieve profit, if you’re not al ready there. And if you are at profitably, ROI is still a valuable measurement of your finances. So by learning how to calculate ROI, you can…
…strategize how to continue developing your product
…determine how much you can spend on further development
…more clearly communicate your position to stakeholders.