Return on investment (ROI) is a measure used to calculate the efficiency or profitability of an investment. This attempts to measure the direct amount of return relative to the cost. It is often impacted by the initial amount invested, cash flow generated and ongoing costs to maintain the investment.
How to Calculate Return on Investment (ROI)?
The return on investment (ROI) formula is simple to calculate and requires the following values:
- Current value of investment
- Cost of investment
The formula used to calculate ROI is:
This cost-benefit analysis includes factors like the cash flow over the investment’s lifetime and any maintenance costs incurred. Since ROI is measured as a percentage, the final result can be easily compared with returns from other investments. This allows shop owners to measure a variety of types of investments against one another.
Why is ROI a useful measurement?
ROI is a useful measurement due to its simplicity to calculate and versatility. While it is most commonly used to measure the performance of marketing campaigns, it can also help shop owners to evaluate whether or not to invest in a shop management software, make purchase decisions for expensive equipment or expand to multiple locations.
In addition to this, it is easy to compare against other possible investments. For instance, a shop may use it to determine the best marketing medium to use for an upcoming slow season. This allows shops to ensure their investments maintain a net positive ROI and make a decision based on the best possible outcome.
What is a good ROI?
Defining a good ROI can vary depending on multiple factors. There is currently no universally accepted percentage that can be deemed as a good ROI. However, when calculating ROI for any investment decision, consider the following to assess whether the final result is worth the investment:
- Risk tolerance
- Investment duration
- Industry standards
- Business goals
Consider these factors along with anything else that may influence your decision to determine whether or not the ROI is meaningful enough for you to continue with your investment.
