Return on Investment: How to calculate ROI for your business

Published Thursday 29 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 metrics for specific business activities
• Additional considerations for small businesses
• Common ways to improve your ROI
• Track your business performance with confidence
• FAQs on ROI

Key takeaways

• Calculate ROI using the simple formula: (net profit ÷ cost of investment) × 100%, where net profit equals total return minus initial investment cost.
• Evaluate ROI based on your specific business context rather than universal benchmarks, considering factors like risk tolerance, strategic alignment, and time frame for returns.
• Recognize that ROI has limitations since it doesn't account for timing, depreciation, financing costs, or non-financial benefits like brand reputation and customer loyalty.
• Track ROI across multiple time periods and business activities to make data-driven decisions about marketing campaigns, equipment purchases, hiring, and other investments.

What is return on investment (ROI)?

Return on investment (ROI) is a financial ratio that measures how much profit you earn from an investment compared to what it costs. ROI helps small business owners make smarter decisions about:

• whether to open a new location or buy new assets
• the success of a marketing campaign or project
• whether ordering from a different vendor is cost effective
• whether to hire new staff

ROI measures profitability relative to cost and is expressed as a percentage. Key difference: ROI focuses on total return versus cost, while rate of return (ROR) measures performance over a specific time period.

How to calculate ROI

ROI formula: (net profit ÷ cost of investment) × 100%. To calculate this, you need two numbers: your initial investment amount and the total return generated.

The formula is simple: (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: $6,500 - $4,000 = $2,500Step 2: Apply ROI formula: ($2,500 ÷ $4,000) × 100% = 62.5%Result: The marketing campaign delivered a 62.5% ROI.

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. Consider these factors when evaluating your ROI:

• Risk tolerance: Higher-risk investments should deliver higher returns
• Business alignment: ROI should support your strategic goals
• Long-term value: Factor in both financial and non-financial benefits

What are the benefits of using ROI measurement?

ROI measurement helps small businesses use data to make decisions and attract investment. Key benefits include:

• Simple interpretation: Positive ROI means profit, negative ROI means loss
• Investment attraction: Investors use ROI to evaluate business opportunities
• Versatile application: Compare performance across tools, products, and services

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

What are the limitations of ROI?

ROI has limits that are useful to understand, and even large organizations review their calculations carefully. For example, a review of major government information technology (IT) projects by the US Government Accountability Office (GAO) found that many investments did not fully meet Office of Management and Budget (OMB) cost-benefit requirements.

• Missing factors: It does not include depreciation, timing, or financing costs, so factor these in separately.
• Timing: It does not show how long your money is invested.
• Non-financial benefits: It does not capture benefits like brand reputation or customer loyalty. A US Government Accountability Office (GAO) review of government IT investments highlighted how hard it can be to measure and explain this type of progress.

So take a balanced approach to ROI and consider it along with other factors such as risk, strategic alignment with your goals, and potential long-term returns (financial and non-financial).

ROI metrics for specific business activities

Marketing ROI measures how much revenue your marketing generates compared to what you spend. Use marketing ROI to evaluate:

• Campaign effectiveness: Compare performance across different marketing channels
• Customer acquisition cost: Calculate how much you spend to gain each new customer
• Return on ad spend: Measure revenue generated per advertising dollar

Sales ROI

ROI tracking can also help you increase sales by assessing sales strategies, promotions, and customer segments.

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). You can find more detail in 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

ROI can also help small businesses understand the effectiveness of hiring, training, and employee development initiatives. It works with metrics such as revenue per employee, employee turnover rate, and employee engagement.

Additional considerations for small businesses

Time frame affects ROI value significantly. Consider this comparison:

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

The marketing campaign delivers better value because it generates returns faster.

Best practice: Calculate ROI over multiple periods (monthly, quarterly, annually) to match your business goals.

Intangible benefits

ROI measures only the financial aspects of an investment, and 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

You might expect some investments to yield a high ROI, but they may also require more risk. 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 all investments
• Track results regularly: Monitor performance to identify what works
• Use accounting software: Get accurate data to measure strategy effectiveness, as inconsistent reporting can undermine accountability. One government review found that cost information was often derived from ad hoc processes rather than from controlled cost-accounting systems.
• Make data-driven decisions: Let ROI calculations guide your choices
• Experiment continuously: Test new approaches to find better returns

Track your business performance with confidence

Understanding ROI helps you make smarter investment decisions and improve profitability. Combine ROI analysis with other financial metrics like cash flow management and profitability analysis for complete business insights.

Ready to track your ROI more effectively? Xero accounting software automatically calculates key financial metrics and provides real-time insights to help you make confident business decisions. Get one month free and start optimizing your returns today.

FAQs on ROI

Here are some common questions and answers about ROI for small businesses.

What's a good ROI for a small business?

There is 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. Use the results to understand what happened so you can improve your next investment. 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.