Return on investment, or ROI, is a common useful ratio of profitability of a company. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets. For the small business owner, that sort of calculation is not useful. However, it can be used on smaller aspects of the business.
In any business, the outlay of money needs to be monitored in order to make sure it is worth it. Let’s take advertising as an example. You decide to do some advertising in your local paper to increase sales. The cost of such campaign is R 3 000 per month over 3 months. Total investmentis R 9 000.
In the first month, you gain new sales of R 2 500, the second month R 4 500 and the third month R 6 000. The total new sales is R 13 000. The owners are not sure if the campaign was worth it, claiming it was too much work and money with little to show for it.
Let’s run the numbers. The ROI formula is the nett profit divided by the total investment as a percentage. Our sales were R 13 000 divided by the investment of R 9 000 as a percentage. The ROI is 44.44%.
ROI is useful in small businesses in short term investments. The results need to be analysed accurately before taking a decision of success. Many accounting packages can run campaigns in a report specifically for that campaign. The critical factor to this though, is the accurate capturing of the information. Incorrect data will skew the results and render them useless. This will result in campaigns looking like successes or failures when they could be the complete opposite.