How to Calculate ROI: Simple Guide for Small Businesses

Published Monday 22 December 2025

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• What are the benefits of measuring ROI?
• What are the limitations of ROI?
• Common ways to improve your ROI
• Make ROI work for your small business
• FAQs on ROI

Key takeaways

• Apply the basic ROI formula (Net Profit ÷ Cost of Investment) × 100 to evaluate any business investment, ensuring you calculate net profit by subtracting the initial investment cost from total returns generated.
• Target at least 15–25% annual ROI on major investments for small businesses, adjusting expectations based on risk level, industry standards, and investment timeframe.
• Use ROI alongside other financial metrics like cash flow analysis and payback period rather than relying on it alone, since ROI doesn't account for time value of money, hidden costs, or qualitative benefits.
• Set measurable ROI targets before investing and track performance regularly using accounting software to make data-driven decisions and optimise future investment strategies.

What is return on investment (ROI)?

Return on investment (ROI) is a financial ratio that measures how much profit you generate from an investment compared to its cost. ROI helps small businesses make critical decisions by showing which investments create value, particularly for those that New Zealand’s Inland Revenue (IRD) defines as having annual income of $33 million or less.

Use return on investment (ROI) to evaluate:

• New locations or equipment purchases: Compare potential returns before investing
• Marketing campaign effectiveness: Measure which campaigns drive profitable growth
• Vendor cost analysis: Determine if switching suppliers saves money
• Hiring decisions: Assess if new staff will generate enough revenue to justify their cost

ROI measures the profitability of an investment relative to its cost, expressed as a percentage. ROI differs from rate of return (ROR): ROR is calculated over a specific period, while an ROI calculation considers only the investment and the amount earned.

How to calculate ROI

ROI calculation requires two key numbers: your initial investment cost and the total return from that investment.

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

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).

ROI calculation example:

A kombucha company spent $4,000 on advertising and generated $6,500 in new sales.

Step 1: Calculate net profit

• New sales: $6,500
• Investment cost: $4,000
• Net profit: $6,500 - $4,000 = $2,500

Step 2: Apply the ROI formula

• ROI = ($2,500 ÷ $4,000) × 100 = 62.5%

Result: For every dollar spent on advertising, the company earned $0.63 in profit.

Accounting software can help you calculate your ROI.

What is a good ROI?

A good ROI varies by industry and investment type, but most small businesses aim for at least 15–25% annual ROI on major investments.

Your target ROI depends on:

• Risk level: Higher-risk investments should deliver higher returns
• Business goals: Strategic investments may accept lower ROI for long-term benefits
• Industry standards: Compare your ROI to similar businesses in your sector
• Time frame: Short-term projects often need higher ROI than long-term investments

What are the benefits of measuring ROI?

Measuring ROI gives three main benefits for small businesses:

• Simple decision-making: Positive ROI means profit and negative ROI means a loss, so it is easy to interpret
• Investment comparison: Compare different opportunities using the same metric to choose the best option
• Stakeholder communication: Show investors and lenders concrete evidence of business performance and growth potential, a requirement for New Zealand companies with ten or more shareholders, which must prepare financial accounts to a higher standard

You can use ROI analysis before making investments to determine viability and after completion to measure success.

What are the limitations of ROI?

ROI limitations mean it shouldn't be your only decision-making tool. ROI doesn't account for several important factors:

• Time value of money: A 20% ROI over one year differs significantly from 20% over five years
• Hidden costs: Depreciation, maintenance, and financing costs aren't reflected in basic ROI calculations
• Qualitative benefits: Brand reputation, customer loyalty and employee satisfaction cannot be measured in ROI but drive long-term success
• Risk assessment: ROI doesn't indicate how likely you are to achieve the projected returns

Use ROI alongside other metrics like cash flow analysis, payback period, and strategic alignment with business goals.

Common ways to improve your ROI

Improve your ROI with these proven strategies:

• Set measurable targets: define specific ROI goals before investing, for example, "achieve 20% ROI within 12 months"
• Track performance regularly: Monitor monthly or quarterly to spot trends and adjust strategies quickly
• Use accounting software: Automate data collection to calculate ROI accurately and consistently
• Make data-driven decisions: Let ROI results guide future investment choices rather than relying on intuition
• Test and optimise: Start with small investments, measure results, then scale successful approaches

Make ROI work for your small business

ROI analysis gives you the financial clarity to make confident investment decisions and grow your business profitably. Combined with regular profitability tracking and cash flow management, ROI becomes a powerful tool for sustainable growth.

Try Xero for free to automatically track the financial data you need for accurate ROI calculations and smarter business decisions.

FAQs on ROI

Here are some common questions small businesses ask about return on investment (ROI).

What's a good ROI for a small business?

Most small businesses should target 15–25% annual ROI on major investments, though this varies by industry and risk level. Compare your results to industry benchmarks using resources like Statista or consult your financial adviser for sector-specific guidance.

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

ROI timeframes vary significantly by investment type:

• Marketing campaigns: 1-3 months for digital advertising, 3-6 months for content marketing
• Equipment purchases: 6-18 months depending on usage and efficiency gains
• Employee training: 6-12 months as skills develop and productivity increases
• New locations: 12-24 months to establish customer base and reach profitability

What if my ROI is negative?

A negative ROI means your investment cost more than it generated. Analysing the reasons behind your negative ROI is essential. For example, was the investment poorly planned, were there external factors at play, or did it not align with your goals and timing? Use the information to improve your future investments.