Return on Investment

What is an return on investment and how is it calculated?

Return on investment is a performance measure used to calculate exactly how effective your investments into your business are at generating income. ROI measures the profitability of investments and helps to compare the efficiency of multiple different investments.

As the name suggests, return on investment is a method used to measure the amount of return that can be made on a particular investment and how this compares and relates to the initial investment cost.

Key takeaways from this section:

  • ROI stands for Return on Investment and is used to measure how much financial benefit you will receive from a particular investment for your business.
  • To calculate ROI, you will have to divide the overall net benefit of an investment by the actual cost of the investment.
  • ROI is not static and so for the best outcome, it is better to calculate it regularly for every notable investment.
  • ROI should be calculated when you invest both time and money into your business.

Understanding return on investment

Any time you invest money or even time into your business, you will have a specific goal and a set of objectives in mind that you wish to achieve which, if met, would indicate that your investment has paid off.

Calculating ROI is also a good way of helping you to understand what is and isn’t working in your business so you can identify areas for improvement and make changes if needed. ROI helps you to delve deeper into the business decisions you make and gives you the chance to answer the question of what you will earn by investing time and money into any particular endeavour for your business.

It's also important to note that ROI isn’t static, and many variables can change with every different investment you make. If you want to calculate ROI and get an accurate sense of your commercial gains or benefits, the best idea would be to calculate ROI regularly so you can keep on top of any changes and make them to your business as needed.

How to calculate return on investment

Simply put, the formula to working out return on investment is as follows:

ROI = Current Value of Investment – Cost of Investment / Cost of Investment

The “Current Value of Investment” refers to the proceeds obtained from the sale of the investment of interest.

To calculate ROI, the benefit or return of the investment in question is divided by the overall cost of the investment. ROI is measure as a percentage which means it can be used to compare with returns from other investments and give you a better idea of what is working for your business and what investments are more beneficial for you.

Return on Equity FAQs

How do you calculate return on investment?

Return on Investment can be calculated by dividing the net benefit of your investment by the overall cost of the investment in question.

What is a typically good ROI?

ROI’s will differ for each business in each industry and entirely depends on a variety of factors including risk tolerance of the investor, time required for the investment to generate results and return and much more.

What industries will have the highest ROI?

Average ROI’s will always differ and develop for different industries due to technological changes, shifts in consumer preferences, fluctuations with competition and more. Arguably, technological industries may have higher ROI’s than others.

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Invoice finance allows you to release cash quickly from your unpaid invoices.

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Want to understand more Cash Flow Finance terms?

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We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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