If you want to find out the return on your investment, you should do a performance check using ROI. Return on investment is also used to analyze the efficiency of various investments and to find out the most profitable one. It basically shows the returns on investments against the cost incurred on a certain investment. In this blog, we’ll discuss what is ROI, how to calculate it, what are its limitations and what are its benefits.
What is ROI?
Return on investment is the payback that is received by the investor against the money invested in a certain business. ROI is used to calculate the profitability of your business. It is shown through a percentage to know the business success. So, you know what is ROI now. Let’s see how can we calculate it.
How to Calculate ROI?
To calculate ROI, you need to divide the amount received from the investment (net profit) by the cost incurred on the investment. Then, you should multiply it by 100. The result of it must be shown in percentage. Here is the simple formula to calculate ROI:
Return on Investment = ( Net Profit / Cost of Investment) x 100
Return on Investment = (Present Value – Cost of Investment / Cost of Investment) x 100
How to use it?
Generally, investors use ROI to examine their portfolios or to evaluate expenses. Business owners can use it for knowing the return on their advertising. You should remember that ROI only provides the result in figures. It doesn’t decrease or eliminate risks and uncertainties. While using ROI for future investment, you can assess how your net profit is going to be. As historical evidence is not enough for a prosperous future of a business.
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How to know Good ROI?
To find out whether your ROI is going to make the difference or not. Ask the following questions:
- How much risk I can afford?
- What will be the consequences of losing the money?
- How much profit is needed for balancing any possible loss?
- How will I invest my money, if I don’t invest?
Limitations of ROI:
There are many benefits that you get by using ROI but still, there are limitations to determine your business success based on it. These are the following:
- You can’t accurately measure the financial health of your business as ROI doesn’t show you the company’s cash flow.
- To calculate ROI accurately, you need to have a lot of experience for your future business expense
- ROI can only calculate the financial success of the specific project
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Benefits of ROI:
Knowing profits and investments can make a great difference for your business. These are the few reasons for which businesses use ROI:
- You can make an estimate and analysis of your investment on both short-term and long-term projects
- You can predict the financial performance of your business using ROI
- It helps you to take fruitful decisions for your business
Quick Sum Up:
So, you have got information on what is ROI, and what are its limitations and benefits and how you can use ROI for your business. The results of ROI helps you to evaluate the progress of your business. They are useful to improve the overall success of your business by estimation.
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Disclaimer: This blog post provides general information on ROI.