Return on Investment: What it Means for Your Business
When it comes to running a business, there are all kinds of terms you'll hear thrown about that you've never really considered before. One of the most common terms is return on investment, or ROI. But how do you explain what kind of ROI your business has if you don't understand the term itself? Here's a quick primer to help get you started with this basic business concept.
In its most basic sense, return on investment is a ration that shows how profitable a business, strategy or asset is compared to the cost needed to make it happen. It works out in a formula something like this to create a percentage:
Return on Investment = (profit from investment - cost of investment) / cost of investment
As an example, if a company's content marketing campaign is checked for its ROI, it helps them decide whether to continue with a similar campaign or change directions entirely. If the company determines that it made $100,000 from the campaign and spent $50,000, the ROI would be 100%.
But why is it important to be able to calculate your company's ROI for various needs? If you're seeking financing, want to improve performance or just want to know which strategies are paying off better for your business, calculating the ROI can help give you or your financial institution a clear indicator of where you stand. A good ROI for a business makes a bank or lender more likely to approve a loan, because they know there's a better chance that the loan will be repaid. An investor may look at a company for the same reasons, whether or not they'll see a fast return on their investment in the business.
By understanding your company's ROI, you can gain a better understanding of what factors impact your business income and how long it will take to pay back the investment you made into it in the first place. Understanding business terms help you communicate how your company is doing, but you don't have to understand every business concept that comes along. At AccountRely, we have a full staff waiting to help you take your business to the next level. Please feel free to contact us today to get started.