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Calculating ROI for Your Business

written by: W. A. Swan•edited by: Michele McDonough•updated: 6/28/2010

What is ROI? Many small businesses have little idea what a return on investment is. Do you need it? Yes, especially if you are watching your costs and profitability closely. Calculating ROI for your business is not hard once you understand the calculation and the use.

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    How to Calculate ROI

    For a business, calculating ROI for your business is important so that you will know how much an investment is generating or costing you in income. Businesses can also use a return on investment calculation to show what a new asset, project, or promotion can generate and how much it would need to generate to show a positive return for your business. In this way, using ROI can help your business make informed decisions on how good or bad an idea or asset is for your company.

    The Definition

    The first thing you must know is what ROI, return on investment, actually stands for. This is what companies use to figure out if a given project or asset is worth investing in for a given amount of time. It is also the number which tells you how well your company is doing at a given time. A business can use ROI to define both profit and loss. The return on investment is represented as a percentage. You can use this number to show how much profit or loss you have between the initial investment in an asset compared to the amount of return from that asset.

    Calculate Return on Investment

    To calculate ROI you will divide your company's net profit from a product or action by the total investment the company made to a product and then multiply by 100. We can use an example to best explain this. We can use a net profit (profit after expenses) of $200. We will use an investment of $500 (the amount of money you put into the product). So using these numbers you will take 200 / 500 x 100 to get your return on your investment. In this case it would be 40% (200 / 500 x 100 = 40). This basically means that you are seeing a 40% return on your investment.

    Using ROI

    You can use return on investment to figure out the actual return for the effort your business put into anything. Companies use ROI to calculate which projects they should work on in a given year to generate the most profit. Small businesses can use ROI to find which type of advertising makes the best value. Another use is when a business forecasts future earnings to figure the amount they would need to generate for an asset to be profitable. An example of this would be the amount of income which is generated by a piece of equipment in relation to how much it would cost to purchase, install, and train people to use the equipment.

    Service businesses also use return on investment to keep themselves profitable. An example is when a freelance writer calculates how much income writing a particular article would generate in regards to the amount of time used to research and produce the article. The end number would be the hourly income generated by writing the article.