Business Math Series: Calculating ROI (Return On Investment) for Business Services
Return on investment is a performance measure used to evaluate the value of an investment. ROI is a pretty straight forward concept and it doesn’t take complicated math to calculate it. I am going to show you the basic ROI formula and then I am going to talk about where a business can use it beyond just buying shares.
Return on investment is calculated by dividing the net benefit of the investment by the cost of the investment.
ROI = (gain from investment) – (cost of investment) / (cost of investment)
Make sure to subtract the cost of the investment from the gain since you are spending money in order to make money. To find the ROI percentage, divide by the cost of investment.
ROI On Investments Beyond the Startup
There are many things a person can invest in besides just a new business venture. At some point a company will invest in new equipment, in marketing, training, advertising, upgrades, in software applications, and web services. For many of these, the ROI is easily defined, in others the ROI is hazy, and with some there is no ROI at all. Here are a few examples of the the return from some common web services:
- A backup and recovery system is a good example of a service that brings peace of mind but does not necessarily pay for itself (barring disaster). Most of us are not likely to ever lose our important files but it is nice to know that they are backed up. ROI on a backup system is most likely going to be 0% but the peace of mind it brings safeguarding sensitive data is priceless.
- Invoicing software and collaboration software are a couple examples of services which probably won’t have a direct ROI but will save a team or department lots of time. And we all know time is money!
- Instant messaging applications, many mobile apps, remote access and syncing applications, are just a few examples of services many of us subscribe to for no return beyond convenience. They have no ROI but are just either really cool to use or they help us stay organized.
- E-commerce solutions have a definite ROI but it might be difficult to measure until after the first year when sales can be compared to previous years.
- Marketing services like Constant Contact and KissMetrics can help bring a company more customers but depending on other factors, it can be difficult to measure.
- Online avertising comes with ROI metrics baked right into the service. A website should be able to monitor conversions from any per per click advertising campaign. Radio and TV advertising isn’t as easy to measure, however.
Services with obvious ROI
Some services have a very clear ROI because they save you something tangible every month. A well designed Time Tracking Service is one such service which saves money from several angles:
- It eliminates buddy punching, so bosses don’t pay their employees for time they aren’t actually on the clock.
- It reduces time padding. Employees cannot write in a time earlier than they actually arrive. This usually saves companies about 10 minutes per day per employee!
- It eliminates inaccuracies in payroll accounting.
Let’s look at this example:
For a company with 5 employees who each pad 10 minutes a day, a secure, location-restricted time tracking service would be reducing payroll hours by 18 and cutting payroll costs by $180 per month if all the employees averaged $10/hour. Timesheets.com costs $27/month. Using our ROI formula above, we will plug in the numbers to get a return on investment of 560%.
(180-27) / 27 = 5.6
That’s pretty good return on investment! Most small businesses benefit by services like this since they are able to correct a variety of time loss problems.