An ROI helps any business owner to understand how successful their business is along with highlighting much-needed improvements. Understanding an ROI also makes it easier to make future financial decisions. A business owner won’t have to guess or overthink about how to allocate their funds or what will be beneficial to the business. Utilizing this key performance indicator (KPI) is done amongst many industries regardless of size. Regardless of if you’re a small business owner or large business owner, learning how to calculate your company’s ROI is useful to you.
What is an ROI
ROI stands for return on investment. An ROI calculates the gain or profit from a specific investment and of course, its losses as well. ROI measures how much you’ve gained from an investment versus how much it costs you. The results of calculating an ROI comes out as a percentage versus a ratio. An ROI typically measures one stand-alone investment against many investments.
Interpreting an ROI
A business’ net return is examined versus just its gains or profits because the net return could be red or in the negative. A positive ROI means that your investment is in the black or the cost of the investment has not exceeded the profit of it. To have a full perspective or scope, make sure to evaluate your annualized ROI. An annualized ROI is the total returns and losses throughout the entire year.
Ways to Use an ROI
Here are a few examples of when using an ROI would be applicable:
- Using new technology: A business that does not use modern technology will not be profitable. Can you imagine trying to get tasks done using computers with slow processors? Still, you want to make sure that the tools you use are more helpful than damaging.
- New Hires: The people that you hire can make or break your business. It is essential to investigate what kind of profitability stems from hiring (and unfortunately, firing) certain individuals.
- Incorporating a new department: Adding, a new department can add value and profitability to your company. However, you don’t want to regret this decision later or come to realize that this department was not useful after all. It could result in lost profit or layoffs. An ROI would help take out the guesswork.
- Sales: Did you know that you can even calculate the ROI on a particular sales strategy? Understanding what kinds of sales strategies are profitable can help your business become more successful instead of wasting time and money.
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