How would you know that the spending on marketing, sales, and other business processes pays off? Return on investment metrics can help measure it. ROI is an indicator that shows the efficiency and profitability of a specific investment. It also allows a company to compare several investment projects to determine which generates the best results.
This article explains how to measure ROI and what return on investment is high enough.
What is an ROI calculator?
An ROI calculator is a tool that simplifies the calculation of return on investment. Such online calculators are available on websites where you can gauge the profitability of your investments for free.
The ROI calculator includes a formula box with fields you will need to fill with accurate data. Be ready to provide the amount invested, the amount returned to start and end dates, and the period. In some tools, you may also select the currency.
Once you share the details and hit the Calculate button, the ROI calculator will show you the investment gain, ROI, and annualized ROI. The additional metrics may vary depending on the online tool you pick.
Importance of ROI
Every business has limited resources and must decide how to redistribute them. Financial estimates of the profitability of your investment show whether the initiative is worth it.
For example, you can assess ROI before taking a loan. The data on the requested amount of predicted expenses and revenue is enough to see whether you will be able to return it.
ROI measurement is also essential before any significant investment. For example, you should complete it if you buy new equipment, launch a software development project, redesign your website, open a branch in a new location, offer franchising services, etc. Thanks to these metrics, you will be aware of the potential income or losses.
How to Calculate ROI?
To calculate the ROI for a specific project, you need to know several details. This data is easy to obtain and doesn’t require complicated calculations. First, you must be ready with:
- Gain from investment. The income received from the measured investment.
- Cost of investment. The amount of money spent on the investment.
Once you get these numbers, use the following formula to check the ROI.
ROI = (Gain from Investment − Cost of Investment) / Cost of Investment
We also recommend measuring ROI using data from a specific period. This way, you will be able to track ROI changes over time and better understand the profitability of the investment.
Free ROI Calculator: How Does it Work?
A free ROI calculator is a basic online tool that runs calculations to speed up manual tasks. Users only need to enter several metrics to know the return on investment in seconds. Below are the main steps to take:
- First, select an online calculator to see what data format it requests.
- Prepare the necessary information, including the invested money, current value of the investment, and time frame.
- Enter the collected details (invested and returned money) in the corresponding fields of the calculator.
- Select a specific period to make ROI results more precise.
- Finally, run the calculation to receive the results.
Limitations of the ROI Calculator
Despite being a convenient way to learn ROI instantly, the calculator might not be reliable in some cases.
In particular, ROI calculations may be insufficient to help you choose between several investments. Some initiatives are more likely to benefit the company in the long run than others. Besides, not all profit is measurable. For example, a campaign may be intended to promote your brand or enhance your reputation instead of bringing revenue.
Moreover, there are different ways to define profit (e.g., controllable profit, before/after-tax). These discrepancies can also lead to data inaccuracies and make the ROI calculator generate unreliable results.
What Is a Good ROI?
As a rule, a good ROI is getting a positive result from an investment. If you expect your business to grow, you need to ensure that the money you pour into it brings even more money. On the other hand, negative ROI means you are doing something wrong, and your strategy doesn’t work.
But there is more to it than that. To understand if the obtained ROI is sufficient, you also need to consider the risk tolerance of your company and the time necessary to generate the profit. Risk tolerance means the degree of variability the company is ready to bear in its financial planning. Investors who don’t like to risk will be willing to have lower ROI for fewer risks. For them, such a return on investment is considered “good.”
You should also factor in the industry where your company operates. Even though the average ROI is 10% annually, you should not consider it a reference. For example, the return on investment is usually much higher in the tech field, while for utilities, the 10% threshold is almost impossible to achieve.
The free ROI calculator is an affordable way to learn the return on investment for any of your projects. By comparing ROI for several initiatives, you can decide which campaigns are worth continuing and which cause losses.