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Calculating return on investment is essential in measuring the progress of a business. For most companies, it serves as a metric that could indicate the success of its business operations, whether it is for a particular event, campaign, or marketing strategy.
Moreover, in a larger scale, being aware of ROI lets entrepreneurs know whether their company is getting the intended results, and this allows them to navigate effectively the future of their ventures.
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Typically, ROI is calculated by deducting the gain from investment from the cost of investment, and then dividing the resulting figure again to the cost of investment. ROIs are frequently expressed in ratio or percentage. For example, if you launch a multimedia campaign for a product worth $10,000, and the profits gained is $5,000, your ROI for that particular campaign is 20 percent.
The metrics for measuring ROI, however, varies in different industries and business operations.
Some entrepreneurs, for instance, use the “cash flow method” to compute their respective ROIs. In a Business Insider article, business expert and author Fred Wilson explains that returns may also depend on the type of business, which mostly has a finite life like restaurants.
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Other companies, meanwhile, create their own formulas due to the complexity of its business. Technology-based firms, for example, base the computation of their ROIs in terms of cost of savings. The same practice goes for other firms like marketing and ad agencies which compute their returns based on factors such as brand awareness or recall.
When computing for ROI, it is also important to determine the different factors that affect one’s business. A positive ROI does not necessarily indicate a successful business.
Tony Hartman of Denver is a finance expert. Get more financial insights by subscribing to this Google+ page.
