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Calculating Return on Investment (ROI)

Forecasting ROI will help you make better-informed business decisions

By W. Eric Martin, Keyboard pounder & synonym selecter TwoWriters.net
To determine which investments or expenses make the most sense for your business, you need to calculate their return on investment (ROI), that is, the amount of profit earned or cost saved for any given use of money. By calculating ROI, you can:
  1. Cancel services that provide little or no return to your bottom line.
  2. Focus on the products and services that help your business the most.
  3. Use previous results to make better business decisions in the future.

 

Know the basics of ROI

You can use a simple online calculator to determine ROI.
Try: Enter your information at Give-to-Get Marketing.

Consider using the "net present value"

Cash today is generally worth more than cash tomorrow due to inflation, so you may want to include that cost in your calculations. Doing so gives you the "net present value" (NPV) of a project, which is somewhat more accurate than ROI.
Try: Use Investopedia's NPV calculator. Odellion Research sells an ROI calculator that includes a discount rate as well as customizable calculators for your specific needs. Solutions Matrix also sells a range of simple to advanced ROI calculators.

Find a calculator built for your needs

For many projects, you'll have to consider all sorts of variables to end up with an accurate ROI. Luckily, there are also a variety of specialized calculators.
Try: Visa offers an online calculator determining whether to accept credit cards at your drive-thru and one that will tell you whether wireless handheld devices for credit card sales are worth using. Keywordtool's calculator shows which keywords and search engine results are converted into sales. Compare which employee training programs deliver a larger ROI with Mediapro. Check out Intel's online calculator to determine whether you need new computers. (Not surprisingly, these calculators are usually provided by companies that sell these services.)

 

  • If you plan to sell your business, prospective buyers will want to know your ROI so they can evaluate your listing price.
  • Don't be blinded by high percentages; keep the bottom line in mind. Which is better: a 200 percent ROI on a $5,000 investment or a 120 percent ROI on a $100,000 investment?
  • Don't forget to include the cost of your labor in any ROI calculation — otherwise you'll get a warped perspective of your company's financial status.

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