What is ROI? How to calculate it and improve returns

Published Thursday 2 April 2026

Table of contents

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

Key takeaways

• Calculate ROI using the formula (Net Profit ÷ Cost of Investment) × 100% to measure how much profit your investment generates compared to its cost, helping you make smarter financial decisions across marketing campaigns, equipment purchases, and hiring decisions.
• Recognise that good ROI varies by industry and investment type, with most small businesses aiming for returns between 5-30%, but always consider risk tolerance, strategic alignment, and long-term benefits rather than chasing the highest percentage alone.
• Use ROI alongside other metrics like cash flow analysis and profitability ratios since ROI doesn't capture important factors like investment timing, depreciation, or intangible benefits such as brand awareness and customer loyalty.
• Improve your ROI by reducing investment costs through better supplier negotiations, increasing revenue through improved pricing strategies, and focusing resources on high-performing investments while cutting underperforming projects.

What is return on investment (ROI)?

Return on investment (ROI) is a financial metric that measures how much profit an investment generates compared to its cost, expressed as a percentage. A positive ROI means you earned more than you spent; a negative ROI means you lost money.

Small business owners use ROI to make decisions like:

• opening a new location or buying equipment
• 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 profit earned, regardless of time.

What are the benefits of measuring ROI?

Measuring ROI helps small businesses make smarter financial decisions. Here's why it matters:

• Investor confidence: Investors use ROI to evaluate whether your business is worth backing
• Simple to interpret: A positive percentage means profit; a negative percentage means loss
• Versatile to apply: Use ROI to compare tools, products, services, or any business investment
• Pre-investment analysis: Calculate expected ROI before committing funds to assess viability. Research shows that rigorous financial assessment can reduce investment risk by 41% and significantly shorten the time it takes to break even

How to calculate ROI

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

To calculate ROI, follow these steps:

1. Identify your net profit: Calculate the total return from your investment minus the cost of the investment
2. Identify your cost of investment: Determine the total amount you spent
3. Divide your net profit by your investment cost: This gives you the return ratio
4. Multiply by 100 to get a percentage: This converts your ratio into a percentage

Accounting software can help you track these numbers and calculate ROI automatically. In fact, organisations using advanced platforms instead of spreadsheets see higher forecast accuracy, faster evaluation cycles, and better risk identification.

Example 1: Marketing campaign ROI

A small kombucha company wants to measure the ROI of an advertising campaign.

• Investment cost: $4,000 spent on ads in one month
• Revenue generated: $6,500 in extra sales from new customers who clicked ads
• Net profit: $6,500 − $4,000 = $2,500
• ROI calculation: $2,500 ÷ $4,000 × 100 = 62.5%

The campaign generated a 62.5% return, meaning the company earned $0.63 for every $1 spent on advertising.

Example 2: Equipment purchase ROI

A bakery buys a new oven for $8,000. Over the first year, the oven enables $3,000 in additional sales from expanded menu items.

• Investment cost: $8,000
• Additional revenue: $3,000 in year one
• Net profit: $3,000 (assuming minimal additional costs)
• ROI calculation: $3,000 ÷ $8,000 × 100 = 37.5%

The oven delivered a 37.5% return in its first year, with potential for continued returns in following years.

Example 3: Hiring decision ROI

A consulting firm hires a new project manager at $60,000 annual salary plus $10,000 in benefits and training.

• Investment cost: $70,000 total compensation
• Revenue generated: $120,000 in billable client work
• Net profit: $120,000 − $70,000 = $50,000
• ROI calculation: $50,000 ÷ $70,000 × 100 = 71.4%

The new hire generated a 71.4% return on the company's investment in their first year.

What is a good ROI?

A good ROI varies by industry, investment type, and your business goals. For instance, a long-term portfolio of index funds might return 7%–10% annually, whereas higher-risk investments in startups are expected to deliver much higher returns to compensate for their volatility. There's no universal benchmark, but most small businesses aim for returns that exceed their cost of capital.

Typical small business ROI ranges from 5%–30%, depending on the investment. Marketing campaigns often target 15–30%, while equipment purchases may yield 10–20% over time.

Whether your ROI is "good" depends on:

• Risk tolerance: Higher-risk investments should deliver higher returns
• Strategic alignment: Does the investment support your business goals?
• Long-term benefits: Consider both financial returns and non-financial gains like brand awareness

What are the limitations of ROI?

ROI has limitations you should understand before relying on it for major decisions.

• Missing cost factors: The formula doesn't capture depreciation, investment timing, or finance costs
• No time element: ROI doesn't show how long your money was tied up to earn that return
• Qualitative returns ignored: Brand awareness, customer loyalty, and employee morale don't appear in ROI calculations, even though they drive long-term success. Recognising this limitation, there's a growing trend to incorporate ESG metrics into financial analysis, with adoption expected to reach 78% by 2027

Use ROI alongside other metrics like cash flow analysis and profitability ratios. Consider risk, strategic fit, and both financial and non-financial returns when evaluating investments.

ROI metrics for specific business activities

ROI applies differently across business activities. Here's how to measure returns in specific areas.

Marketing ROI

Marketing ROI measures the effectiveness of campaigns, channels, and tactics. Key metrics include:

• Customer acquisition cost (CAC): How much you spend to gain each new customer
• Return on ad spend (ROAS): Revenue generated per dollar spent on advertising
• Conversion rate: Percentage of prospects who become paying customers

Sales ROI

Sales ROI helps you assess strategies, promotions, and customer segments. Track these metrics:

• Sales growth rate: Percentage increase in revenue over time
• Average order value (AOV): Typical spend per transaction
• Customer lifetime value (CLTV): Total revenue expected from a customer relationship

Project ROI

Project ROI evaluates the financial viability of new initiatives. Common metrics include:

• Net present value (NPV): Current value of future cash flows minus investment cost
• Internal rate of return (IRR): Expected annual growth rate of the investment

Employee ROI

Employee ROI measures the effectiveness of hiring, training, and development. Look at:

• Revenue per employee: Total revenue divided by headcount
• Employee turnover rate: Percentage of staff leaving annually
• Employee engagement: Productivity and satisfaction indicators

Additional considerations for small businesses

Time frame significantly affects how you interpret ROI results. The same percentage return means different things over different periods.

Consider two investments, both with 25% ROI:

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

The marketing campaign delivered the same return in half the time, making it the more efficient investment. Calculate ROI over different periods (monthly, quarterly, annually) to compare investments fairly and align with your business goals.

Intangible benefits

ROI captures only financial returns. Other valuable outcomes don't appear in the calculation:

• Brand awareness: A social media campaign may not generate immediate sales but builds recognition
• Customer loyalty: Improved service may reduce churn without showing direct ROI
• Employee morale: Training investments improve retention and productivity over time

Factor these benefits into your overall evaluation, even when ROI looks modest.

Risk vs. reward

High ROI often comes with higher risk. A speculative investment might promise 50% returns but carry significant chance of loss. Assess your risk tolerance before chasing maximum ROI. Steady, lower-risk investments may better suit your business goals.

Common ways to improve your ROI

You can improve your ROI through strategic actions that either increase returns or reduce costs. Here are five ways to boost your ROI:

1. Reduce investment costs: Negotiate better rates with suppliers, buy used equipment when appropriate, or find more cost-effective solutions
2. Increase revenue: Improve your pricing strategy, upsell existing customers, or expand into new markets
3. Improve operational efficiency: Automate repetitive tasks, streamline processes, or reduce waste
4. Focus on high-performing investments: Direct more resources toward initiatives with proven returns and cut underperforming projects
5. Track and optimise continuously: Monitor ROI regularly and adjust your strategy based on what the data shows

FAQs on ROI

Here are answers to common questions about calculating and using ROI.

What's the difference between ROI and profit?

ROI is a percentage that compares profit to the cost of investment, while profit is the absolute amount of money you earned. For example, a $1,000 profit on a $5,000 investment gives you a 20% ROI.

Can ROI be negative?

Yes. A negative ROI means you lost money on the investment. For example, if you spent $10,000 on equipment but only generated $7,000 in returns, your ROI would be -30%.

How often should I calculate ROI?

Calculate ROI when making investment decisions, evaluating ongoing projects, and during regular business reviews. The frequency depends on your business cycle, but quarterly or annual reviews work well for most small businesses.

Is a higher ROI always better?

Not necessarily. Higher ROI often comes with higher risk. A 100% ROI on a speculative investment may be riskier than a 20% ROI on a stable, predictable investment. Consider risk, time frame, and strategic fit alongside ROI percentage.

What's a realistic ROI for a small business?

Most small businesses aim for ROI between 5%–30%, though this varies by industry and investment type. Marketing campaigns might target 15–30%, while equipment purchases may deliver 10–20% over several years.