ROI: what it is, how to calculate it, and why it matters

Published Monday 26 January 2026

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• What are the benefits of using ROI measurement?
• What are the limitations of ROI?
• ROI calculation examples for small businesses
• ROI metrics for specific business activities
• Additional considerations for small businesses
• Common ways to improve your ROI
• Making ROI work for your business
• FAQs on ROI

Key takeaways

• Calculate ROI using the formula (net profit ÷ cost of investment) × 100 to measure how much profit you generate from any business investment relative to its cost.
• Apply ROI analysis to compare different investment options like marketing campaigns, equipment purchases, staff hiring, and vendor changes to make data-driven decisions about where to allocate your resources.
• Recognize that ROI has limitations and should be used alongside other factors like risk assessment, time frame, and intangible benefits such as brand reputation when evaluating investments.
• Track ROI regularly using accounting software to monitor performance monthly or quarterly, set clear measurable goals for each investment, and focus resources on strategies that deliver the highest returns.

What is return on investment (ROI)?

Return on investment (ROI) is a financial ratio that measures how much profit you generate from an investment relative to its cost. This calculation helps small businesses make smarter decisions about:

• New locations: Whether expanding will generate enough profit
• Marketing campaigns: Which strategies deliver the best returns
• Vendor changes: If switching suppliers will save money
• Staff hiring: Whether new employees will boost revenue

ROI shows investment profitability as a percentage of your initial cost.

ROI differs from rate of return in one key way. Rate of return measures performance over a specific time period. ROI focuses only on the total investment cost versus total return.

How to calculate ROI

ROI calculation requires two numbers: your initial investment cost and the total return generated.

The formula is: (net profit ÷ cost of investment) × 100 = ROI percentage

In the formula, net profit is the total return from the investment minus the cost of the investment (the total amount spent on the investment).

Here's an ROI calculation example:

A small kombucha company wants to know the ROI of a recent marketing strategy that involved an advertising campaign. To calculate ROI, the company first determines the value of kombucha sales generated from the campaign, then subtracts the costs to get the net profit, then divides that total by the campaign's overall spend.

Suppose the company spent $4,000 in one month on the advertisements and attributed $6,500 in extra sales that month to new customers who clicked on ads. The net profit is 6,500 - 4,000 = $2,500. The company divides the 2,500 by 4,000, meaning the ROI is 62.5 per cent.

Accounting software can help you calculate your ROI.

What is a good ROI?

A good ROI depends on your specific business situation rather than universal benchmarks. What makes an ROI worthwhile varies based on:

• Risk tolerance: Higher-risk investments should deliver higher returns
• Company goals: Strategic investments may accept lower ROI for long-term benefits
• Investment type: Marketing campaigns differ from equipment purchases
• Time frame: Quick returns versus long-term growth strategies

What are the benefits of using ROI measurement?

Measuring ROI helps small businesses make better financial decisions. Fluctuations in investment can drive the business cycle, accounting for about half of gross domestic product movements during the Great Recession. Key benefits include:

• Simple calculation: Easy to compute and understand results
• Clear interpretation: Positive ROI means profit, negative means loss
• Investor appeal: Shows potential returns to attract funding
• Versatile application: Compare marketing campaigns, tools, products, and services
• Decision support: Choose between multiple investment options

You can also use ROI analysis before making a particular investment to determine its viability.

What are the limitations of ROI?

Use ROI alongside other measures when you make investment decisions.

Key limitations include:

• Missing factors: Doesn't account for depreciation, timing, or financing costs
• Time blind: Ignores how long money stays invested
• Quantitative only: Misses qualitative benefits like brand reputation or customer loyalty
• Incomplete picture: Doesn't show risk levels or strategic value

Consider ROI alongside other factors like risk assessment, strategic alignment, and long-term business goals.

ROI calculation examples for small businesses

Seeing the ROI formula in action can make it easier to understand. Here are a couple of common scenarios for small businesses.

Example 1: Buying new equipment

A local cafe buys a new espresso machine for $5,000. After one year, they calculate that the new, faster machine helped generate an additional $8,000 in profit from coffee sales.

The calculation would be:

• Net Profit: $8,000
• Cost of Investment: $5,000
• ROI = ($8,000 / $5,000) * 100 = 160%

Example 2: Running a marketing campaign

A retail boutique spends $1,000 on a social media advertising campaign. The campaign directly results in $3,500 of new sales.

The calculation would be:

• Net Profit: $3,500 - $1,000 = $2,500
• Cost of Investment: $1,000
• ROI = ($2,500 / $1,000) * 100 = 250%

ROI metrics for specific business activities

Marketing ROI measures how much revenue your marketing activities generate compared to their cost. This helps you identify which campaigns deliver the best returns.

Key marketing ROI applications:

• Campaign comparison: Compare email, social media, and paid advertising performance
• Channel optimization: Identify your most profitable marketing channels
• Budget allocation: Invest more in high-performing campaigns
• Customer acquisition cost: Calculate how much you spend to gain each new customer
• Return on ad spend: Measure revenue generated per dollar spent on advertising

You can use ROI analysis to determine the effectiveness of marketing campaigns, channels, and tactics in improving ecommerce revenue. For example, you can use ROI analysis to determine the customer acquisition cost (CAC), return on ad spend, or conversion rate.

Sales ROI

ROI tracking can also help you increase sales by assessing sales strategies, promotions, and customer segments. You can use ROI to examine metrics such as sales growth rate, average order value (AOV), and customer lifetime value (CLTV).

Learn tips for increasing sales.

Project ROI

Measuring ROI helps evaluate the financial viability of new projects. It uses metrics such as net present value (NPV) and internal rate of return (IRR).

Employee ROI

Amid economic trends like slowed labour force growth, you can use ROI to understand how effective your hiring, training, and employee development initiatives are. It works with metrics such as revenue per employee, employee turnover rate, and employee engagement.

Additional considerations for small businesses

Small businesses should evaluate these factors when measuring investment returns.

Time frame

Time frame example: Two investments both show 25% ROI, but deliver very different value:

• Marketing campaign: 25% ROI in one year = strong performance
• Equipment purchase: 25% ROI over two years = weaker performance

The one-year investment generates returns twice as fast, making it more valuable despite identical ROI percentages.

When you choose the time frame for measuring ROI, consider your business goals. You might calculate ROI monthly, quarterly, annually, or biannually.

Intangible benefits

ROI measures only the financial aspects of an investment, but other business measures (such as increased brand awareness, customer loyalty, and employee morale) are also important. Consider these along with ROI when evaluating the success of a project or strategy.

Risk vs reward

You might expect some investments to yield a high ROI, but they may also require more risk. For example, after a sharp drop in oil prices, investment in Canada's oil and gas sector declined by almost 50 per cent in just two years.

Assess your company's risk tolerance when considering whether to undertake investments to maximize ROI.

Common ways to improve your ROI

Improve your ROI with these proven strategies:

• Set clear goals: Define specific, measurable objectives for each investment
• Track results regularly: Monitor performance monthly or quarterly
• Use accounting software: Get accurate data to measure strategy effectiveness
• Make data-driven decisions: Let ROI calculations guide your choices
• Test new approaches: Experiment with different tactics to find better returns

Using accounting software gives you the information you need to measure how effective your strategies are.

Making ROI work for your business

Understanding and calculating ROI helps you make smarter, more confident decisions for your business. It moves you from guessing to knowing which investments are paying off. By tracking these numbers, you can focus your resources where they matter most and drive real growth.

Using accounting software makes it easy to pull the data you need for these calculations, so you can spend less time on bookkeeping and more time running your business. See how Xero can help you get a clear picture of your finances when you try Xero for free.

FAQs on ROI

Here are answers to common questions about ROI for small businesses.

What's a good ROI for a small business?

There's no single answer. It depends on your industry, goals, and tolerance for risk. In general, aim for an ROI that exceeds your cost of capital, but be sure to benchmark against your industry averages. To find benchmarks for your industry, use websites like Statista or ask your financial advisor.

How long does it take to see a return on investment?

It depends on the investment type. For example, some marketing campaigns might show investment returns within weeks, while investments in new equipment or employee training might take months or even years to generate a positive ROI.

What if my ROI is negative?

A negative ROI means your investment cost more than it generated. Analyzing the reasons behind your negative ROI is essential. For example, was the investment poorly planned, were there external factors at play, or was it simply a bad decision? Use the information to improve your future investments.