How to Calculate Return
On Investment
Whether you are looking for investors to finance your business or funding your business yourself, one of the first things you will want to know is Return on Investment (ROI). Let me walk you through the formula.
ROI is normally expressed as a percentage. The ROI formula gives you the answer as a decimal. You can express the decimal as a percentage by multiplying the decimal by 100 and adding the "%" sign.
Investors will think about "wealth" rather than money per se because a business may own things such as equipment or real estate that has value, but is not actual cash. To include everything of value, return on investment measures how much wealth changes over time. ROI is a rate of growth.
To measure your ROI you will have to know
three things:
- Net profit: The amount the business has earned beyond what is needs to cover its costs.
- Total investment in the business: This includes Start-Up Investment (the amount of money that was required to get the business started plus additional money invested later).
- The period of time for which you are calculating ROI. This is typically one month or one year.
ROI Formula = Net Profit/Investment = ROI
There is an easier way to remember the ROI formula: What you made over what you paid, times one hundred. Let's look at an example.
Net Profit:
The income statement shows this to be $775
Investment:
You invested $1,000 in shoes and $25 in Flyers, plus $500 to rent a booth at the flea market. Total = $1,525
Time Period:
We will calculate the ROI for one day.
Simply divide investment into the net profit.
Net profit ($775)/Investment ($1,525) =.508 X 100 = 51%
Your ROI was 51 percent for that day. ROI tells you what the rate of return was on your investment in your business. I encourage members to ask questions if you are still a bit confused.