Hello and welcome back to Make more, do more weekly tip #88. This week we are covering a our series of tips on 10 Tips for Startups, and tip #4 is…
What is ROI?
ROI (return on investment) isn’t the same as profit. ROI is a ratio of your company’s net profit compared to your financial investment in the business. Profit is the return received on a business undertaking after all operating expenses have been met. As an entrepreneur, you want to increase your ROI and profit. Doing so, depends tremendously on your ability to manage your funds and assets.
Understanding How and If You’ll Make a Profit
To calculate ROI, the gain (return) of an investment is divided by the cost of the investment; the result is recognized as a percentage or a ratio. The ROI formula is:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
Keep in mind that the calculation for ROI and, therefore the definition, can be modified to suit any situation – it depends on what’s included as returns and costs. This means there is no right calculation for ROI. The versatility has a downside, as ROI calculations can be easily manipulated to suit the user’s needs, and the outcome can be expressed in a variety of ways. So many things to know when it comes to ROI, if you need help understanding them all, try partnering with a professional to research everything you need to know about calculating your ROI for various areas in your business.
More in this series:
Managing your Startup Costs and Generating Cash Flow – Tip#1
Building your Business Budget – Tip#2
Protecting your Assets – Tip#3
What is ROI? – Tip#4
The Business Plan
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Rhonda Holscher
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