What is the Return on Investment (ROI)?
Return on investment is the means for individuals and businesses to measure the profitability of an investment of any kind. Knowing the ROI of an investment over a period of time is an important tool for comparing different business decisions and the benefits that each brings.
An ROI is a percentage and one of the most common metrics businesses use for meeting goals and setting expectations for projects and investments. ROI is most commonly used in finance to measure the growth of investments like securities, however, it can be used to measure the success of any expense made to grow the business. This can include new software, training, marketing and advertising campaigns, new locations, etc.
How to Calculate
In finance, the ROI is the literal return of profit from an investment made and is simple to calculate. To determine the ROI, divide the difference in the cost vs the current value by the initial cost, according to Investopedia.
(Current Value – Initial Cost) / Initial Cost
Multiply that by 100 and you’ll get a percentage representing how profitable the investment was. So, if you bought shares in a company at $100,000, then a year later sold those same shares for $150,000, you can calculate your ROI to be 50 percent.
There are calculators online that can make it easy to figure out.
Calculating the ROI for business expenses can be more vague and complicated. It’s hard to determine the precise return received from paid training or a new piece of equipment meant to make your job faster. How do you determine the ROI of a long-term project or initiative involving several new purchases, training and time away from other tasks?
It’s important to have a specific goal when making a costly business decision. If you expect an investment to pay off in better profitability, you need to have a baseline of how much revenue certain aspects of your business pulls in on a monthly and/or yearly basis. This way, when you make investments, you can better make estimates of how much of a return your investment is bringing in.
There are plenty of factors to take into account when determining what your return is. Since sometimes it’s tough to point to your investment as the reason your revenue grew or dipped, so it’s important to hone in on the specific aspect that you’re investing in.
Profits aren’t the only thing you can determine an ROI on. Social ROI is used to determine the effectiveness of initiatives on factors that aren’t as tangible as profit such as employee satisfaction or public image. The same equation applies, you just need to create a scale to quantify whatever it is you’re investing in.
What It Means
ROI is an essential factor when making new business decisions and investments. Recording the ROI of all your investments will help when weighing the cost-benefit of similar business decisions. It’s often used by teams as a key performance indicator (KPI) to judge the effectiveness of their projects. Obtaining a projected ROI can be a clear-cut goal for managers to give their teams when coming up with new strategies. Department heads that expect results from their teams will likely want to hear the ROI from their efforts.
When your ROI for a certain project is low, it’s an indicator that it’s not a good investment and it’s time to reallocate your resources elsewhere. When the ROI for a new piece of software is high, then it’s an indicator to invest more into it.
When you expect ROI from new tools, careful research and information gathering are necessary in order to form an estimate and make a sound business decision. Investing in a powerful document management system is a great way to increase efficiencies in your business, and reduce wasted time locating and organizing documents. eFileCabinet is a document management solution that aims to make your everyday business processes more efficient, resulting in saved time and money. To see eFileCabinet in action and how it can result in improved ROI for your business, fill out the form below to see a free demo.