ROI and Why It Is So Important For Your Business
YRSK | Published: 09-02-21
At its basics the calculation of ROI is pretty straightforward:
just divide your gains from the given investment by the cost of it and you get your ROI in the form of a ratio/percentage. If the ratio is a positive number the investment is supposed to have resulted in a gain, and if negative, it implies a loss. Suppose a company wants to install a new machine to increase productivity. Its ROI would look something like the following: (Income flow after the installation of the new piece of machinery –the cost of it). Elegantly simple as the formula is, determining the ROI turns out to be somewhat more complex than just a simple arithmetic as the cost of the investment involves a lot more than just the payment made to the supplier as it may involve such less obvious elements as the value of the time spent on decision making, carriage, fees, the cost of training and even the psychological costs in the form of stress and strain involved in the whole exercise.
ROI helps you make important business decisions such as:
Acquiring a new machine/tool—the ROI on this acquisition helps you determine how much your profitability has improved as a result of the acquisition of new machine/equipment.
Hiring new employees—just as with machines, calculating the ROI on the investment in the new employees gives you a clear idea as to whether your profitability increased/decreased following the induction of the employees.
A change in the marketing strategy—working out the ROI on the investment in the adoption of the new strategy lets you know whether or not the strategy has improved your profitability.
In fact, almost all business decisions require justification by their respective ROI’s. If one is not sure whether or not their efforts are yielding the desired results how can profitability be optimized? An understanding of the ROI is crucial for any business to thrive.
ROI, and why it is so important for your Business
Even in our d normal day to day life, whenever we have to commit our time, energy and money in doing something we tend to ask ‘what do I gain from it?’. Whatever we get from an expenditure of our resources i.e. time, energy and money (investment) whether happiness, a sense of self-satisfaction-as from donating for a cause- or a material reward, is the ‘return’ from that investment. No wonder this consideration is so important for a business too. Formally called Return on Investment, ROI, it is a key measure of performance which is used by a business determine the profitability, i.e. return, from any outlay of funds, i.e. investment.