How to Calculate the Return on Investment for Your Startup

How to Calculate ROI for a Startup

Return on investment is a typical business concept for calculating the financial benefits of an investment. To measure the performance of a business, managers and executives often calculate the return on investment (ROI). This value can be used to define anything from a monetary return to an efficiency ratio and is typically expressed as a percentage or a ratio. 

In this article, we will go through the definition of Return on Investment, the importance and benefits of ROI calculations, and teach you how to calculate ROI for your startup.

What is ROI?

Return on investment is a performance measure that can be used to evaluate the effectiveness or profitability of an investment or compare the efficacy of several different investments. The return on investment, or ROI, is an attempt to directly evaluate the amount of return on a specific investment in relation to the cost of the investment.

A company can measure the profitability of any expenditure by calculating the return on investment. Buying pens or fixing an employee's desk are expenses that may not have a direct or monetary return on investment (ROI), but they are still part of a more significant investment. Spending money on a graphic designer to make commercials, a photographer to capture headshots, or a web developer to redesign the company's website are all investments with the potential for a return.

Return on investment (ROI) is a standard metric to assess a project's viability. An angel investor, for instance, might want to calculate the expected return on their investment before putting money into a company. Divide the annual income or profit by the initial or current investment to estimate the return on investment (ROI).

What is ROI used for?

The return on investment (ROI) metric can assess numerous investment choices by contrasting them to their starting prices. Calculations of return on investment (ROI) are frequently used by businesses when considering previous or prospective investments.

Individuals can analyze their investments and compare one investment to another, whether a stock holding or a financial stake in a small firm, by calculating the return on investment (ROI) and comparing the two.

Sometimes, businesses will employ a project's return on investment (ROI) as a metric of its performance. Before committing to an advertising campaign, a business owner will want to know what kind of return they can expect on their investment. A company's return on investment is considered positive if the money earned is greater than the sum spent.

When calculating annualized ROI, the average yearly return on investment realized during the investment term is what you're after. This is useful because the return on investment (ROI) doesn't account for the time spent holding an investment when calculating ROI. The rate of return on an annualized basis is helpful for comparing the results of various investments across different time frames.

What Are Examples of ROI Calculations?

Businesses might encounter difficulties calculating the investment amounts for each part of the ROI equation.

Considerable investment in new computers, for instance, has several deployment expenses that must be calculated and accounted for. The company must calculate the total cost of ownership, which includes the purchase price, any applicable taxes and shipping fees, any consultation or support fees paid, and the cost of initial installation and ongoing upkeep.

After that, the company would need to determine its net profit for a specified time frame. Hard monetary gains from enhanced efficiency and decreased upkeep expenses relative to older computer systems may contribute to these bottom-line gains.

Thus, a company can compare the return on investment (ROI) of two different computer systems by factoring in upfront expenses and long-term benefits. Which of these two computers, then, is the better financial bet?

At the end of the specified period, the company may use actual data for the total net income and the entire investment cost to determine the ROI. The computer implementation can be gauged by comparing the actual and predicted ROI.

What Are the Benefits of ROI?

When making decisions for your business, knowing how investments affect your profits and your business is essential and beneficial.

There are many benefits to calculating ROI for your business. Let's take a look at some.
 

• It's easy to figure out how to calculate return on investment. It only requires a few numbers that may easily be found in any set of financial statements or balance sheets. You need a few business metrics, like net profit and the amount of investment required, which will give you a quick idea of your initial investment.
   
• It's easy to figure out what your ROI means. If the number is positive, you made money on this investment. If the number is negative, it means you lost money. ROI is easy to understand, even for people who aren't accountants. Because it is so widely used and so simple to calculate, it enables more accurate comparisons between various companies regarding their investment returns. This makes the calculation results a valuable metric to use when talking to investors.
   
• ROI can be worked out for several different investments or your business. This lets you see what parts of your business have been helped by a particular investment, like a marketing campaign that brought in more money or a second location that helped you sell more. As we mentioned, it is a metric used to measure the success of an organization's financial decisions for a specific department or division. The improved metric will help determine which businesses or teams are the most profitable.

How Do You Calculate ROI?

For big companies, figuring out ROI can be a difficult task. But the process is easy for people who own small businesses.

For example, to determine the return on your first business investment, you need to know how much you put into the business and, if you have any, how much long-term debt you have now. You will also need to know how much money you made after taxes for the year. All this information is in your accounting software, your spreadsheet, or your accounting journals.

There are several ways to figure out the ROI. Most people use net income divided by the total cost of the investment = Net income / Cost of investment x 100.

Here is an example of how a business might calculate its return on investment.

Let's assume that Joel has an e-commerce business. He runs an e-commerce business that sells dog-related products. He wants to raise awareness and boost sales before the holidays, so he buys some social media ads. He spent a total of $2,000 on ads on social media sites to get people to visit his site during the holidays. 

After the end of the holiday shopping season, Joel does the math on his net profit and discovers that the online store he owns has made $10,000 more money than it did during the same time the previous year. After that, he can calculate the advertising's return on investment using the following formula:

ROI = (10,000 / $2,000) x 100 = 500%

This indicates that Joel made five dollars more in net profit for every dollar he invested in advertisements. He can now start to budget for increased expenditure for the upcoming holiday season now that he has seen such a high return on investment (ROI).

Why Is ROI Important for Your Business?

Making smart financial decisions is essential for the success of your business. Your return on investment (ROI) is a crucial metric that can help you compare different investment strategies and determine which will make you the most money.

You can use this metric to make business decisions like investing in a new business or buying a new property to make room for growth.

You can A/B test ways to invest, like on social media platforms. This could be a comparison between Meta and Instagram in terms of your return on investment. For example, you could put the same amount of money into advertisements on each platform, which may give you a better return.

By comparing and evaluating this metric across different investment channels, you can make better financial decisions, get the best return, and grow your business.

How to Increase Your ROI

Depending on what kind of investment you want to make, the best way to increase returns will vary. But there is a way you can try before investing to increase your chances of getting a high return on your money. Eurokick is the solution!

Eurokick is ready to help your startup calculate your return on investment and increase your ROI. Eurokick supports and monitors your startup in every way possible.

Contact us and get more information now!