Return on investment: How to calculate ROI for your business

Published Thursday 27 November 2025

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• ROI calculation examples for small businesses
• What is a good ROI?
• 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
• How to improve your ROI
• Making ROI work for your small business
• FAQs on ROI

Key takeaways

• Calculate ROI using the formula (Net Profit ÷ Cost of Investment) × 100 to determine whether your business investments are generating profit or losses.

• Aim for ROI above 15-20% for significant investments, but evaluate this against your industry standards, risk tolerance, and investment timeframe rather than relying on a universal benchmark.

• Use ROI alongside other metrics like payback period and risk assessment since ROI alone ignores timing, hidden costs, and qualitative benefits like brand reputation or employee morale.

• Track your investments consistently using accounting software and set specific, measurable goals before investing to improve your ROI performance over time.

What is return on investment (ROI)?

Return on investment (ROI) is a [profit](https://www.xero.com/uk/guides/<a href=)ability-ratios/">financial ratio that measures how much profit you generate from an investment relative to its cost. It shows whether your business decisions are making or losing money.

ROI helps you make smarter business decisions, such as:

• expanding to new locations or buying equipment
• running marketing campaigns to see which strategies deliver the best results
• switching suppliers to save money
• hiring new employees to boost profitability

ROI is expressed as a percentage and focuses purely on profit versus cost. This differs from rate of return (ROR), which measures performance over a specific time period.

How to calculate ROI

ROI calculation shows you exactly how profitable your investments are. You need two pieces of information: your initial investment amount and what that investment generated.

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

Net profit = Total return from investment - Cost of investment

This calculation shows if you made or lost money, and by how much.

ROI calculation example

A kombucha company wants to measure their advertising campaign success:

• Campaign cost: £4,000
• Extra sales generated: £6,500
• Net profit: £6,500 - £4,000 = £2,500

Step 2: Apply the ROI formula

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

What this means: For every £1 spent on advertising, the company earned £0.63 in profit. This strong ROI shows the campaign was highly successful.

ROI calculation examples for small businesses

Here are some examples of how small businesses calculate ROI.

Example 1: A new coffee machine for a cafe

A cafe owner spends £3,000 on a new espresso machine. Over the next year, they track their coffee sales and find they've made an extra £5,000 in profit directly from the new machine's speed and quality.

• Net profit = £5,000
• Cost of investment = £3,000
• ROI = (£5,000 / £3,000) × 100 = 166.7%

This high ROI shows the new machine was a very profitable investment.

Example 2: New software for a design agency

A design agency invests £1,200 for a year's subscription to a new project management tool. The software helps them finish projects faster, allowing them to take on two extra projects that bring in £4,000 of profit.

• Net Profit = £4,000
• Cost of Investment = £1,200
• ROI = (£4,000 / £1,200) * 100 = 333.3%

The software helped the agency earn much more than it cost.

What is a good ROI?

A good ROI is one that is higher than what you need to cover your costs and is better than most businesses in your industry, but the right ROI depends on your goals.

Consider these factors when evaluating your ROI:

• Risk level: Higher-risk investments should deliver higher returns
• Business alignment: Does the investment support your core goals?
• Time frame: Short-term vs long-term investment horizons
• Industry standards: What's normal for your sector?
• Non-financial benefits: Brand awareness, customer loyalty, employee satisfaction

General guideline: Most small businesses aim for ROI above 15-20% for significant investments, though this varies widely by industry and investment type.

What are the benefits of using ROI measurement?

ROI has many benefits for small businesses:

• Decide whether to invest in a business
• Calculate and interpret results easily
• Compare tools, products, or services to see which perform best

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

What are the limitations of ROI?

ROI limitations can lead to poor investment decisions if you rely on this metric alone. Understanding these gaps helps you make more informed choices.

Key limitations:

• Time blind: ROI doesn't show how long investments take to pay off. This delay is present even at the national level, where provisional business investment estimates are published six weeks after a quarter ends, with revised figures released even later.
• Ignores timing: When you invest matters, but ROI doesn't capture this
• Missing costs: Depreciation, financing costs, and opportunity costs aren't included
• No risk assessment: High and low-risk investments can show identical ROIs
• Qualitative benefits ignored: Brand reputation, employee morale, and customer loyalty don't appear in ROI calculations

Bottom line: Use ROI with other metrics like payback period, net present value, and risk assessment for a complete analysis.

ROI metrics for specific business activities

Here are key metrics for specific business small business activities.

Marketing ROI

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

You can find tips for increasing sales in this guide.

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

ROI can help you see if hiring, training, and employee development are effective.

Additional considerations for small businesses

Small business ROI considerations go beyond the basic calculation. Consider these factors to make better investment decisions.

Time frame

Time frame example:

Two investments both show 25% ROI:

• Marketing campaign: 25% ROI in 1 year
• Equipment purchase: 25% ROI in 2 years

Why this matters: The marketing campaign is actually twice as effective because it delivers the same return in half the time.

Recommended approach: Calculate ROI over multiple periods (monthly, quarterly, annually) to understand true performance and compare investments fairly.

Intangible benefits

ROI measures only the financial aspects of an investment – other business measures (like 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

Some investments with high ROI may also carry more risk. Check your risk tolerance before investing.

How to improve your ROI

Improve your ROI with these proven strategies:

• Set specific targets: Define clear, measurable goals before investing
• Track consistently: Regular monitoring helps you spot problems early and optimize performance
• Use accounting software:Automated tracking provides accurate data for ROI calculations and trend analysis
• Make data-driven decisions: Let ROI guide your investment choices, not gut feelings
• Test and iterate: Small experiments help you find what works before making large investments

Making ROI work for your small business

Use Xero reporting tools to track your investments and calculate ROI easily. Try Xero for free.

FAQs on ROI

Here are answers to some common questions about ROI.

What's a good ROI for a small business?

There's no single answer – it depends on your industry, goals, and risk tolerance. In general, aim for an ROI that is higher than your costs, and compare it to others in your industry. To find benchmarks, 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. Some marketing campaigns may show returns within weeks. Investments in new equipment or employee training may take months or years to generate a positive ROI.

What if my ROI is negative?

A negative ROI means your investment cost more than it generated. If your ROI is negative, look at what happened. For example, was the investment planned well, were there outside factors, or could you make a better choice next time? Use what you learn to improve future investments.