{"id":4649,"date":"2018-07-18T15:45:13","date_gmt":"2018-07-18T19:45:13","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=4649"},"modified":"2025-04-24T11:02:00","modified_gmt":"2025-04-24T15:02:00","slug":"how-to-calculate-roi","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/how-to-calculate-roi\/","title":{"rendered":"Understanding return on investment"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tUnderstanding return on investment\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2018-07-18T15:45:13-04:00\">July 18, 2018<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"Understanding return on investment\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/how-to-calculate-roi\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/ryangrundy\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/11\/Ryan-Grundy.jpg\" class=\"entry-author__image\" alt=\"ryan-grundy\" \/>\t\t\t\t<span class=\"entry-author__name\">Ryan Grundy<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>A solid understanding of <a href=\"https:\/\/www.sage.com\/en-us\/blog\/glossary\/return-investment-roi\/\" target=\"_blank\" rel=\"noopener noreferrer\">ROI<\/a> is integral to determining the profitability of your investments and making sound decisions that generate positive returns.&nbsp;<\/p>\n\n\n\n<p>To maximize your financial success, it&#8217;s important to understand the following key components:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The basics: what is return on investment?<\/li>\n\n\n\n<li>How to calculate return on investment properly<\/li>\n\n\n\n<li>What to avoid when calculating return on investment<\/li>\n\n\n\n<li>The inherent flaw in ROI<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-return-on-investment-roi\">What is return on investment (ROI)?<\/h2>\n\n\n\n<p>ROI is the simple measure of what you have gained from an investment in relation to what the investment has cost you. <\/p>\n\n\n\n<p>In addition to being used to evaluate the profitability of an investment, ROI is often used as a comparative tool between different investments to determine optimal strategy going forward.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-is-return-on-investment-calculated\">How is return on investment calculated?<\/h2>\n\n\n\n<p>Here\u2019s how to calculate return on investment quickly through the use of a formula:<\/p>\n\n\n\n<p><strong>ROI = [(Gain \u2013 Cost) \/ Cost] x 100<\/strong><\/p>\n\n\n\n<p>For more context, consider this scenario:<\/p>\n\n\n\n<p>Let\u2019s say you invested $2,000. Two years go by and you decide to sell your shares for what they\u2019re now worth: $3,200. To determine your ROI, follow these four steps:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Take the total gain from your investment:\u00a0$3,200<\/li>\n\n\n\n<li>Subtract all costs associated with your investment (your initial investment amount):\u00a0$3,200 &#8211; $2,000 = $1,200<\/li>\n\n\n\n<li>Divide that number (your net gain) by the total cost of your investment:\u00a0$1,200 \/ $2,000 = 6<\/li>\n\n\n\n<li>Multiply that number by 100 to make it a percentage:\u00a06 x 100= 60%<\/li>\n<\/ol>\n\n\n\n<p>Your investment yielded an ROI of 60%. Good work!<\/p>\n\n\n<div class=\"single-cta\">\n\t<a\n\t\tclass=\"button button--primary gate-07b2de02-834c-45aa-9ed4-8042b04893e9\"\n\t\trole=\"button\"\n\t\tdata-button-location=\"content_area\"\n\t\thref=\"#gate-07b2de02-834c-45aa-9ed4-8042b04893e9\"\n\t>Download guide<\/a>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-utilize-the-four-main-types-of-roi\">How to utilize the four main types of ROI<\/h2>\n\n\n\n<p>Perhaps the most appealing aspect of ROI is its versatility. <\/p>\n\n\n\n<p>The above example outlined a simple investment to familiarize you with the concept. <\/p>\n\n\n\n<p>When utilized more comprehensively in a business context, there are four main types of ROI:<\/p>\n\n\n\n<p><strong>Operational \u2013 <\/strong>This figure helps you gain an overall understanding of your business\u2019s performance, allowing you to see where your profits are being made as well as the areas that aren\u2019t as effective. Follow the basic formula tailored to the area in question to calculate operational ROI:<\/p>\n\n\n\n<p>ROI = [(Gain \u2013 Cost) \/ Cost] x 100<\/p>\n\n\n\n<p><strong>Technical <\/strong>\u2013 This figure helps you understand how the costs of any new equipment or technologies employed by your business compare to the benefits or savings they deliver, allowing you to determine if those costs make financial sense to maintain. Follow this formula to calculate technical ROI:<\/p>\n\n\n\n<p>TROI = [(Total Savings \u2013 Technical Costs) \/ Technical Costs] x 100<\/p>\n\n\n\n<p><strong>Marketing&nbsp;<\/strong>\u2013 What is ROI in marketing? It\u2019s a measure to help you better understand how your business\u2019s marketing is going, allowing you to make informed decisions on how much capital you should devote to marketing going forward. Follow this formula to calculate marketing ROI:<\/p>\n\n\n\n<p>MROI = [(Growth in Sales \u2013 Marketing Costs) \/ Marketing Costs] x 100<\/p>\n\n\n\n<p><strong>Competitive&nbsp;<\/strong>\u2013 If you want to know if your competitor is doing something you should be doing, you can use competitive ROI. Compare your ROI figures to those of your competition as a strategic measure to help discover if there\u2019s something missing in your business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-mistakes-to-avoid-when-calculating-roi\">Mistakes to avoid when calculating ROI<\/h2>\n\n\n\n<p>When calculating ROI, it\u2019s crucial that the right numbers are used. <\/p>\n\n\n\n<p>ROI will reveal different outcomes using different types of data. <\/p>\n\n\n\n<p>To experience any degree of accuracy, you have to consider where your business wants to see growth and utilize all relevant numbers from that area. <\/p>\n\n\n\n<p>Although it\u2019s tempting to celebrate a positive ROI by any means, you have to be both realistic and strategic if you want to make the best decisions for your business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-consider-all-associated-costs\">Consider all associated costs<\/h2>\n\n\n\n<p>For example, in marketing, if you\u2019re considering the usefulness of your company\u2019s latest campaign, the growth of sales metric is certainly relevant. <\/p>\n\n\n\n<p>However, without also factoring in all aspects of the marketing costs associated with that campaign, you aren\u2019t accurately representing the investment or its return.<\/p>\n\n\n\n<p>Similarly, consider the investment example we used where we invested $2,000 and after two years, the investment grew to $3,200. <\/p>\n\n\n\n<p>Say it was actually an investment in a bicycle shop and during the shop\u2019s first few months in business, you spent your weekends helping out for free. <\/p>\n\n\n\n<p>To produce an accurate picture of your ROI, you would have to quantify that time and include it into the costs associated with your investment, yielding a lower, but more realistic ROI than previously calculated.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-compare-like-terms\">Compare like terms<\/h2>\n\n\n\n<p>One of the most common mistakes companies make when using ROI calculations is comparing unlike figures.<\/p>\n\n\n\n<p>Your investment is always defined in terms of cash. <\/p>\n\n\n\n<p>However, the measurable returns on your income statement are often expressed as profit or revenue\u2014figures not necessarily indicative of actual cash flow.<\/p>\n\n\n\n<p>One way to avoid this mistake is using your company\u2019s cash flow statement. <\/p>\n\n\n\n<p>Since the cash flow statement reflects the actual amount of cash entering and leaving the company, it will provide a more realistic view of your ROI in a given area.<\/p>\n\n\n\n<p>Keep in mind that the most important thing to consider when calculating ROI is your unique set of business goals. <\/p>\n\n\n\n<p>From that starting point, you can most effectively evaluate your progress using the relevant data.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-flaw-in-roi\">The flaw in ROI<\/h2>\n\n\n\n<p><a href=\"https:\/\/www.sage.com\/en-us\/blog\/why-return-on-investment-roi-is-flawed\/\" target=\"_blank\" rel=\"noopener noreferrer\">As we&#8217;ve discussed previously<\/a>, while ROI is ubiquitous with understanding business value, the flaw in calculating return is that we are not taking into consideration business risk and the potential cost of <em>not<\/em> moving forward with investments. <\/p>\n\n\n\n<p>As Ed Kless states, &#8220;there are situations where not investing in something will have a significant deleterious effect on the business.&#8221;<\/p>\n\n\n\n<p><strong>Running a business is hard work, and learning the jargon can make it easier for you to get through your daily operations. <\/strong><\/p>\n\n\n\n<p><strong><a href=\"https:\/\/www.sage.com\/en-us\/blog\/glossary\/\" target=\"_blank\" rel=\"noopener noreferrer\">The Sage Advice glossary<\/a> can help with some &#8220;must-know&#8221; business terms.<\/strong><\/p>\n\n\n\n \n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">A guide to small business finance<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>In this guide we&#8217;ll walk you through the financial statements every small business owner should understand and explain the accounting formulas you should know.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-07b2de02-834c-45aa-9ed4-8042b04893e9\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download guide<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327779575-1440x810.jpg\" class=\"single-cta__image\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1327779575-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A solid understanding of ROI is integral to determining the profitability of your investments and making sound decisions that generate positive returns.&nbsp; To maximize your financial success, it&#8217;s important to understand the following key components: What is return on investment (ROI)? ROI is the simple measure of what you have gained from an investment in [&hellip;]<\/p>\n","protected":false},"author":1398,"featured_media":3149,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[43],"tags":[110,299,152,155],"business_type":[40],"lilypad":[],"context":[],"industry":[],"persona":[96,95],"imagine_tag":[209,230],"coauthors":[591],"class_list":["post-4649","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","tag-accounting-101","tag-cash-flow","tag-starting-a-business","tag-staying-competitive","business_type-small-business"],"sage_meta":{"region":"en-us","author_name":"Ryan Grundy","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2017\/12\/moneymanagement.jpg","imagine_tags":{"209":"Accounting","230":"Small business"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice US","distributor_original_site_url":"https:\/\/www.sage.com\/en-us\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/4649","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/users\/1398"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/comments?post=4649"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/4649\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media\/3149"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media?parent=4649"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/categories?post=4649"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/tags?post=4649"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/business_type?post=4649"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/lilypad?post=4649"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/context?post=4649"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/industry?post=4649"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/persona?post=4649"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/imagine_tag?post=4649"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/coauthors?post=4649"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}