Businesses invest lots of human and capital resources into marketing, asset purchases and outreach. Their goal, of course, is to generate the best return on every dollar spent, every hour worked and every keystroke made.
Return on investment, or ROI, measures how much money or other tangible benefits the business makes on every investment.
For example, if a business invests in a modern computer system to expand its reach and improve its service to Internet shoppers, the return on investment would measure how many new customers it gained and how much these newcomers spent. These gains would be analyzed in relation to the amount of the investment.
ROI should be considered for every business investment, and various formulas can be used.
To calculate the classic ROI formula, the prospective business investor divides the cost of the investment into the estimated benefit or gain — the returns after costs are subtracted.
The equation, expressed as a percentage, looks like this: Percent ROI = (Gains – Cost) / Cost.
It seems straightforward and simple: A negative number equals a poor ROI, while a positive one suggests a good investment — and the higher the positive number the better the investment potential.