ROI plays a significant role in business and is one of the most important metrics used by a company to calculate the long-term profit or loss of an investment or purchase. Calculating the ROI of a significant investment can be highly beneficial when making future projections. It will aid in deciding whether to invest in a similar asset or to reconsider a particular purchase depending on past results. Although ROI shouldn’t be used as a standalone metric when making financial decisions for the future, it can prove to be one of the single most critical factors when combined with other data.
This article will cover the following topics:
- What is ROI, and why is it important?
- Why should you calculate ROI?
- How to calculate ROI
- Examples of ROI
- What can stakeholders do with ROI calculations?
- Calculate your ROI today with PayEm
What is ROI, and why is it important?
ROI is an acronym for ‘return on investment’ and can be calculated using a specific formula. The ROI of an investment may reflect a loss or a gain depending on several different factors. ROI analyzes an investment’s financial return or loss, and this profitability ratio can prove indispensable when making future financial decisions. The ratio will demonstrate the amount of profit and loss generated by a particular investment in direct relation to its cost. This formula provides vital information about the cost efficiency of an investment, and it can be expressed as either a ratio or a percentage.
Why should you calculate ROI?
Investing in a particular asset or series of products may seem like a good idea, and if sales are healthy, it’s easy to think that it was a good investment. However, from a business standpoint, it’s imperative to look at the data and the actual numbers to determine whether this investment was profitable or just appeared that way based on an increase in sales. Calculating and examining a business’s true ROI makes it easier to make efficient investments and make future investment decisions based on facts instead of assumptions.
ROI is explicitly used for comparing returns from different purchases or investments. By comparing the ROI, the financial decision maker can choose whether to reinvest their dollars or divest and switch gears to a more profitable alternative. Taking ROI into consideration when making future financial decisions can aid a business in maintaining long-term profitability and increasing its operational efficiency by avoiding unnecessary losses.
How to calculate ROI?
Calculating ROI is a relatively simple process that involves dividing the amount of money earned from an investment, known as the net profit, by the cost of the investment and multiplying it by 100. Another way to calculate ROI is to subtract the cost of the investment from the present value and then divide it by the cost of the investment. This amount is then multiplied by 100 to get a percentage value.
ROI = (Net profit / Cost of Investment) X 100
ROI = (Current Value - Cost of Investment / Cost of Investment) x 100
Examples of ROI
If a company invested $4,000 in an asset and then sold shares in it for $4,500, the ROI calculation would be represented like this:
ROI = ($4,500 - $4,000 / $4,000) x 100
In the aforementioned example, the return on investment for the asset would be calculated at 12.5%. This basic percentage value doesn’t account for additional expenses associated with acquiring the asset or the time needed to turn a profit. However, this basic calculation allows you to compare it to other ROI percentages for similar investments to see which yields the highest profit.
Examples of when ROI can help to track profits or losses include:
New hires: By keeping track of the return on investment related to the new hire, it will be easier to understand whether they are costing the company money or adding to the bottom line.
New equipment: Purchasing new equipment and products can be a significant asset to any business; however, it must be done wisely. It’s essential to calculate the ROI stemming from new equipment purchases to see if similar purchases should be made in the future.
Sales methods: Certain sales techniques require an upfront investment. However, to decide whether or not to keep using the particular sales method, it’s important to track the ROI related to the upfront costs required.
What can stakeholders do with ROI calculations?
Stakeholders can use ROI calculations when deciding whether or not to make an investment decision. The calculations provide valuable information demonstrating an investment’s performance to date. Whether the investment reflects a gain or a loss, a stakeholder can use this information to glean important data about how the same investment would perform in the future. Financial decision-makers can compare ROI percentages across various assets to decide which ones deserve reinvestment and which deserve to be discarded. This approach allows stakeholders to optimize their investment strategies to ensure the best possible results.
Calculate your ROI today
Calculating the ROI of an investment can be facilitated with the right tools and support. PayEm is an all-in-one platform that offers effective ROI calculation via PayEm’s ROI calculator tool. This calculator can easily calculate the ROI of an asset or investment the company is considering moving forward with.
When you choose PayEm as your all-in-one platform for connected finance solutions, you have access to a powerful suite of tools and resources to help move your business forward, the perks of which include:
- A centralized dashboard for the management of financial systems
- An easy-to-use interface for simple approvals and spend management protocols
- Auto categorize and sync with existing ERP systems
- Immediate access to ROI tools to help plan your investments wisely
- Simplified multi-territory management
When it comes down to it, PayEm’s ROI tools can assist you in making the right decision about whether to go with an investment or whether to use company funds for other more potentially profitable investments. In addition, with PayEm, you can enjoy company-wide optimization in many critical areas, including procurement, vendor management, spend management, and more. So, are you looking for an in-depth ROI analysis? Contact PayEm’s experts for a commitment-free, no-cost demo of the platform.
Jordan A. W. Steinberg