All companies aim to make a profit and reduce expenses. Throughout a year of work, several investments are made with the purpose of obtaining financial gains. However, when it comes to investing in some stock, we are not sure if we will get the desired return, so there is always a risk associated with all the decisions. ROI – return on investment – is a very important concept for companies and in today’s article we’ll cover everything you need to know about ROI!
What is ROI?
ROI is the acronym for return on investment. This value represents the profit obtained after a certain investment and is commonly used in the evaluation of operational investments, such as acquisition of equipment, computer equipment, participation in events and marketing actions.
How to calculate ROI?
The formula for calculating ROI is very simple:
ROI = ((Revenue – Costs) / Costs) * 100
When calculating a return on investment, only costs and income related to the investment should be included, not the overall results of the company. The following example shows us how ROI applies in practice: a company will participate in a marketing event that costs € 10,000. During the event, they will generate leads that will become customers and in the next 5 years these customers will make a profit of € 20,000 to the company. The return in this case is 100%.
Advantages of calculating ROI
One of the main advantages of this calculation is the reduction of expenses and the increase of profit. It is essential to calculate the return on all actions performed, because only then managers can realize what actions result and which do not add value to the company. Thus, the company will be able to eliminate the investments that generate only expense. However, it must be borne in mind that some investments generate profit only after a considerable period of time. The manager must evaluate all the repercussions of the investment not only in the immediate but also in the long term.
The calculation of the ROI allows to improve progressively, because the company is able to follow the evolution of the investments, identifying standards and allowing to improve its performance. More than identifying the importance of each investment, the calculation of ROI also contributes to a positive evolution of the business.
Calculating this figure allows managers to make decisions faster because they often follow the status of the company and its investments. In this way, when choosing a particular investment, they will know the history of past actions and feel safer to decide.