What is ROI and how to calculate it for your business

Published Thursday 2 April 2026

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• ROI vs. other financial metrics
• What are the benefits of using ROI measurement?
• What are the limitations of ROI?
• ROI metrics for specific business activities
• Additional considerations for small businesses
• Common ways to improve your ROI
• Grow your business with Xero
• FAQs on ROI

Key takeaways

• Calculate ROI using the formula (Net Profit ÷ Cost of Investment) × 100% to measure how much income your investments generate compared to their cost, helping you make confident decisions about marketing campaigns, equipment purchases, and business expansion.
• Use annualised ROI calculations when comparing investments with different time frames, as this adjusts returns to reflect a yearly rate and provides more accurate comparisons between short-term and long-term opportunities.
• Recognise that ROI has limitations including ignoring time factors, excluding hidden costs like depreciation, and missing qualitative benefits such as brand awareness or employee morale that don't appear in financial calculations.
• Track ROI regularly using accounting software and combine it with other metrics like cash flow analysis and strategic alignment to make well-rounded investment decisions rather than relying on ROI alone.

What is return on investment (ROI)?

Return on investment (ROI) is a financial ratio that measures how much income an investment generates compared to its cost. You express it as a percentage. A positive ROI means your investment made money; a negative ROI means you lost money.

ROI helps small business owners make confident decisions about:

• opening a new location or buying new assets
• evaluating marketing campaign success
• comparing vendor costs
• deciding whether to hire new staff

ROI differs from rate of return (ROR). ROR measures returns over a specific time period, while ROI focuses only on the investment amount and the income it generated.

How to calculate ROI

To calculate ROI, you need to know the initial investment amount and the amount the investment generated. ROI equals the income generated divided by the initial cost.

Basic ROI formula

The ROI formula is: (Net Profit ÷ Cost of Investment) × 100%

To calculate ROI, you need two numbers:

• Net profit: the total return from your investment minus the cost of the investment
• Cost of investment: the total amount you spent

Divide your net profit by your investment cost, then multiply by 100 to get your ROI percentage.

Annualised ROI calculation

Annualised ROI adjusts your return to reflect a yearly rate, making it easier to compare investments with different time frames.

Use this formula: Annualised ROI = [(1 + ROI)^(1/n) − 1] × 100%

Where "n" is the number of years the investment was held.

Example: If an investment delivers 50% ROI over two years:

• Annualised ROI = [(1 + 0.50)^(1/2) − 1] × 100%
• Annualised ROI = [1.225 − 1] × 100% = 22.5%

This tells you the investment earned roughly 22.5% per year, which you can compare directly to a one-year investment.

ROI calculation example

Here's how a small kombucha company calculated the ROI of an advertising campaign:

1. Identify the investment cost: The company spent $4,000 on advertisements in one month
2. Calculate the return: The campaign generated $6,500 in extra sales from new customers who clicked on ads
3. Find the net profit: $6,500 − $4,000 = $2,500
4. Apply the formula: ($2,500 ÷ $4,000) × 100 = 62.5%

Result: The marketing campaign delivered a 62.5% ROI, meaning the company earned $0.625 for every dollar spent.

Accounting software can help you calculate your ROI.

What is a good ROI?

A good ROI depends on your industry, goals, and risk tolerance. There's no universal benchmark, but many small businesses aim for an ROI that exceeds their cost of capital.

As a general guide:

• 5–10% ROI: is considered acceptable for low-risk investments, with long-term index fund portfolios often returning 7% to 10% annually
• 10–25% ROI: is considered strong for most small business activities
• 25%+ ROI: is considered excellent, though often involves higher risk

When evaluating whether your ROI is good, consider:

• Risk tolerance: consider whether higher-risk investments should deliver higher returns
• Strategic alignment: assess whether the investment supports your business goals
• Long-term benefits: consider that some investments deliver value beyond immediate financial returns

ROI vs. other financial metrics

ROI is one of several metrics you can use to measure business performance. Understanding when to use each metric helps you make better decisions.

ROI vs. ROE (return on equity)

ROI measures the return on any investment relative to its cost. ROE (return on equity) measures how efficiently a company generates profit from shareholders' equity.

• Use ROI when evaluating specific investments like marketing campaigns, equipment purchases, or new hires.
• Use ROE when assessing overall business profitability or comparing your performance to competitors.

ROI vs. ROAS (return on ad spend)

ROAS (return on ad spend) measures revenue generated per dollar spent on advertising. For example, a 2:1 ROAS ratio means a business earns $2 for every $1 spent, which is slightly above the current industry average. Unlike ROI, ROAS doesn't account for other costs like production or overhead.

• Use ROI when you want a complete picture of profitability including all costs.
• Use ROAS when comparing the direct revenue impact of different advertising campaigns.

When to use each metric

Choose the right metric based on what you're measuring:

• Evaluating a specific project or purchase: use ROI
• Measuring overall business efficiency: use ROE
• Comparing advertising campaigns: use ROAS
• Assessing long-term project viability: use IRR (internal rate of return) or NPV (net present value)

What are the benefits of using ROI measurement?

ROI measurement helps small businesses make smarter financial decisions and communicate value to stakeholders. Here are the key benefits:

• Simple to calculate: you only need two numbers (investment cost and return) to get a clear percentage
• Easy to interpret: a positive ROI means profit; a negative ROI means loss
• Versatile application: compare marketing campaigns, evaluate equipment purchases, or assess product performance
• Investor communication: demonstrate profitability to potential investors or lenders
• Forward-looking analysis: evaluate potential investments before committing funds

What are the limitations of ROI?

ROI has limitations that small business owners should understand. While useful, it doesn't tell the complete story of an investment's value.

Key limitations include:

• Ignores time factors: ROI doesn't account for how long your money is invested, making it difficult to compare short-term and long-term investments
• Excludes hidden costs: the basic formula doesn't capture depreciation, financing costs, and ongoing maintenance
• Misses qualitative benefits: brand awareness, customer loyalty, and employee morale don't appear in ROI calculations
• Oversimplifies complex decisions: some investments deliver strategic value that you can't measure in immediate financial returns

Use ROI alongside other metrics like cash flow analysis, payback period, and strategic alignment to make well-rounded decisions.

ROI metrics for specific business activities

ROI applies differently depending on what you're measuring. Here's how to use ROI for common small business activities.

Marketing ROI

Marketing ROI measures how effectively your campaigns generate ecommerce revenue, with some channels like email marketing able to yield $40 for every $1 spent. Track these metrics:

• Customer acquisition cost (CAC): calculate total marketing spend divided by new customers acquired
• Return on ad spend (ROAS): measure revenue generated per advertising dollar
• Conversion rate: track the percentage of prospects who become paying customers

Sales ROI

Sales ROI helps you assess which strategies, promotions, and customer segments deliver the best returns. See the guide for tips for increasing sales. Key metrics include:

• Sales growth rate: measure the percentage increase in sales over a period
• Average order value (AOV): calculate average revenue per transaction
• Customer lifetime value (CLTV): estimate total revenue expected from a customer relationship

Project ROI

Use project ROI to evaluate whether new initiatives are financially viable before you commit resources. Use these metrics:

• Net present value (NPV): calculate the current value of future cash flows minus the initial investment
• Internal rate of return (IRR): find the discount rate at which NPV equals zero

Employee ROI

Employee ROI measures the return on hiring, training, and development investments. Efficiency metrics demonstrate this, like Nubank's ability to maintain a low operating cost per customer of just $0.80 while experiencing massive growth. Track:

• Revenue per employee: calculate total revenue divided by number of employees
• Employee turnover rate: track the percentage of staff leaving annually
• Training effectiveness: measure performance improvements after development programmes

Additional considerations for small businesses

Small businesses should consider several factors when evaluating investment returns.

Time frame

Two investments with identical ROI percentages can deliver very different value depending on timing.

Consider this comparison:

• Marketing campaign: delivers 25% ROI over one year
• Equipment purchase: delivers 25% ROI over two years

The marketing campaign delivers the same return in half the time, making it more valuable when you factor in opportunity cost. Calculate ROI over different periods (monthly, quarterly, annually) to understand how quickly investments pay off.

Intangible benefits

ROI measures financial returns only. Some investments deliver value that doesn't appear in the numbers:

• Brand awareness: consider that a social media campaign may not generate immediate sales but builds recognition
• Customer loyalty: recognise that loyalty programmes may reduce short-term margins but increase lifetime value
• Employee morale: note that team training improves retention and productivity over time

Weigh these intangible benefits alongside ROI when making decisions.

Risk vs. reward

Higher potential ROI often means higher risk. Before pursuing high-ROI opportunities, assess:

• Your cash reserves: assess whether you can absorb a loss if the investment fails
• Your business stage: consider that established businesses may tolerate more risk than startups
• Diversification: spread investments to reduce the impact of any single failure

Common ways to improve your ROI

Improving your ROI requires consistent tracking and strategic adjustments. Follow these steps:

• Set clear goals: define specific, measurable objectives for each investment
• Track results regularly: monitor performance weekly or monthly to spot trends early
• Use accounting software: automate data collection to measure strategy effectiveness accurately
• Make data-driven decisions: let ROI guide where you invest time and money
• Experiment strategically: test new approaches on a small scale before committing larger budgets

Grow your business with Xero

Understanding ROI helps you evaluate how decisions affect profitability and make smarter choices. Combine ROI analysis with profitability tracking and cash flow management for a complete picture of your business performance.

With Xero's accounting software, you can easily track investments, measure returns, and spot opportunities for improvement. With real-time reporting and automated calculations, you spend less time on spreadsheets and more time growing your business.

Get one month free and see how Xero simplifies your financial management.

FAQs on ROI

Here are answers to common questions about calculating and using ROI for your small business.

What's a good ROI for a small business?

A good ROI exceeds your cost of capital and meets or beats industry averages. Most small businesses aim for 10–25% ROI, though this varies by industry and risk level.

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

ROI timelines range from weeks to years depending on the investment type. Marketing campaigns often show returns within weeks, while equipment purchases or employee training may take months or years to generate positive ROI.

What if my ROI is negative?

A negative ROI means your investment cost more than it earned. Analyse what went wrong (poor planning, external factors, or timing issues) and use those insights to improve future investment decisions.

What's the difference between ROI and ROE?

ROI measures the return on a specific investment relative to its cost. ROE (return on equity) measures how efficiently a company generates profit from shareholders' equity. Use ROI for individual investments; use ROE for overall business performance.

Can you have an ROI over 100%?

Yes. An ROI over 100% means your investment earned more than double its cost. For example, if you invest $1,000 and earn $2,500 in returns, your net profit is $1,500, giving you an ROI of 150%.