## ROI: Understand it. Calculate it. Perfect it.

So much goes into sustaining a small business. You have overhead, insurance matters, loans, credit scores, customer happiness, employee happiness, legal regulations and countless other things to worry about. It’s crucial though that you know how important ROI, (return on investment), is to any business, but especially small businesses and start-ups. Have you ever heard the phrase “more bang for your buck”? You may even remember the old Pepsi ad with the slogan “more bounce to the ounce”. This is essentially the idea of ROI, except applied to your investments and whether they create loss or gain. For the most part, ROI refers to financial investments, but it can just as easily be applied to investments of time.

### Calculate it.

Thanks to InvestingAnswers, a personal finance reference site, we have a formula for calculating return on investment. ROI = (Net Profit ÷ Cost of Investment) X 100. Here are a few examples to show how different investment types create different returns:
##### Example 1
You decide to purchase \$2,500 worth of advertising for your business, half on print and half online. After one month, your total bottom line profit increases by \$1,000. This would mean the ROI for the first month of advertising is (1,000 ÷ 2,500) X 100, which equals 40%. [Note: For strictly one month, the ROI was negative, but as profit continues to increase due to the ads, it can/will become positive.]
##### Example 2
You hire a new operations manager. You determine it will cost you \$40,000 for the first year, including salary, benefits, training, equipment, etc. That manager’s initiatives bring in a total of \$75,000 profit. The ROI for the new manager is (75,000 ÷ 40,000) X 100, which equals 187.50%. [Note: This is an excellent ROI. Just hope your manager maintains that savvy! A lack of profit the following year could lower this percentage.]
##### Example 3
You are in the business of pharmaceuticals and need to replace a high-end tablet press. It’s going to cost you \$4,680. The press makes 900 tablets per minute, each of which net you a total profit of 1/50 of a cent. The press runs for 16 hours a day, five days a week, creating \$3,456 in profit every month. For the first month after replacement, the ROI turns out to be (3,456 ÷ 4,680) X 100, which is about 73.85%. [Note: Provided you spend zero on repair for the press, month two will bring an ROI of nearly 148% but if you have to replace it again or have it repaired, that month-two percentage will plummet.]
##### The calculation of ROI
is not an exact science. It’s more of a concept. Hopefully, in this following section, we provide enough of a foundation for you to start to maximize your ROI. Several other methods exist on how to calculate it mathematically other than the one provided above. Using profit divided by investment cost and multiplying by a hundred is merely the most prevalently used method.