If you are a business owner who has invested plenty of time and money in a venture – you are bound to calculate your return on investment. This is crucial, since businesses are all about making profits. Who wouldn’t want to enjoy a hefty return on investment?
Calculating the Return on investment is not a simple, straightforward process. As your business gets bigger, the process becomes even tougher. And, in this post, you will read about how to calculate the return on investment for a small company. Let’s dive in!
What does the ROI formula represent?
Technically, the return on investment formula is used to measure the amount you have revive, against the actual investment. The benefit of starting the business can be understood with the final value. This is why the ROI of a company is always computed in the form of a percentage.
Let’s put together the ROI formula in simple words:
(Return / initial investment) * 100
The “100” is introduced to convert the value into a percentage.
A Simple example
The formula to compute your return on investment is rather simple. Now, it would be the best time to understand it with a quick example. Imagine you have started the business with 200,000 USD. Hard work, smart decisions, and the right team has helped you increase the net worth of your company to 300,000 USD. You gain is as much as 100,000 USD. This means, your return on investment was 50%. In case the net worth of the company increased to 400,000 USD, your return would be 100%.
In real life, the return on investment cannot compute “this” easy. Those who invest in multiple businesses, and when there are many stakeholders involved – the process gets more complicated.
For example, if you reinvest the profit into your business, the initial investment will increase. This will have an impact on the actual return on investment.
Also Read: Top Richest Entrepreneurs in the World
In the above example, if you take 20,000 USD and re-invest in your business, the total initial contribution would be 220,000 USD. Now, if your return is 300,000 USD, the gain is as much as 80,000 USD. This means the ROI of your business is a little above 36%. But, if the business made 350,000 USD with the additional investment, your ROI will be a little above 59%.
Computing return on investment is an art. It involves many factors and complications. This is why most companies have dedicated teams for completing this task.