What is return on investment (ROI)? How to calculate it

Published Monday 30 March 2026

Table of contents

• What is return on investment (ROI)?
• How to calculate ROI
• What is a good ROI?
• Why ROI matters for small businesses
• What are the limitations of ROI?
• ROI for specific business activities
• How to improve your ROI
• Additional considerations for small businesses
• Use Xero to track ROI with confidence
• FAQs on ROI

Key takeaways

• Calculate ROI using the formula (net profit ÷ cost of investment) × 100 to measure how much you earn for every rand invested and compare different business opportunities objectively.
• Use ROI alongside other metrics like cash flow, risk assessment, and strategic alignment rather than relying on it alone, since ROI doesn't account for time, hidden costs, or qualitative benefits like brand awareness.
• Set clear, measurable goals for each investment and track results regularly using accounting software to spot trends early and make data-driven decisions about where to allocate your resources.
• Consider the time frame when evaluating ROI percentages, as the same return achieved in less time indicates a more efficient investment that frees up capital for other opportunities sooner.

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. Small business owners use ROI to make smarter decisions about spending and growth, though research shows that variables like company age and size can have a negative effect on the return on investment.

Common uses for ROI include:

• evaluating whether to open a new location or buy new equipment
• measuring the success of a marketing campaign or project
• comparing costs when switching vendors
• assessing the value of hiring new staff

ROI expresses profitability as a percentage, showing how much you earned relative to what you spent.

ROI differs from rate of return (ROR). ROR factors in a specific time period, while ROI focuses only on the investment cost and the amount earned.

How to calculate ROI

The ROI formula is: (net profit ÷ cost of investment) × 100.

To use this formula, you need two numbers:

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

The result is a percentage that shows how much you earned for every rand invested.

Here's an ROI calculation example:

A small kombucha company wants to measure the ROI of a recent advertising campaign. Here's how they calculated it:

1. Identify the revenue generated: The campaign brought in R6,500 in extra sales from new customers who clicked on ads.
2. Subtract the cost: The company spent R4,000 on the advertisements. Net profit = R6,500 − R4,000 = R2,500.
3. Apply the formula: R2,500 ÷ R4,000 × 100 = 62.5%

Result: The campaign delivered a 62.5% ROI, meaning the company earned R0.63 for every R1 spent.

What is a good ROI?

A good ROI depends on your industry, goals, and risk tolerance. There's no universal benchmark because what counts as good varies by situation.

When evaluating ROI, consider:

• risk tolerance: higher-risk investments often require higher returns to be worthwhile
• strategic alignment: does the investment support your business goals?
• long-term value: some investments deliver benefits beyond immediate financial returns

Why ROI matters for small businesses

ROI helps you make confident decisions about where to spend your money. For small businesses with limited resources, understanding which investments pay off is essential for growth.

Here's why ROI matters:

• attracts investors: investors use ROI to evaluate whether your business is worth funding
• simplifies decision-making: a positive ROI means profit; a negative ROI means loss
• compares options easily: use ROI to determine which tools, campaigns, or products perform best
• validates investments before you commit: analyse potential ROI to assess viability before spending

What are the limitations of ROI?

ROI is useful, but it doesn't tell the whole story; for example, one study found that, surprisingly, sales growth does not generate a significant return on investment in some models. The formula leaves out several factors that affect real-world profitability.

Here's what ROI doesn't account for:

• time: ROI doesn't factor in how long your money was invested
• hidden costs: depreciation, financing costs, and timing aren't reflected in the formula
• qualitative benefits: brand awareness, customer loyalty, and employee morale don't show up in ROI calculations

Take a balanced approach. Use ROI alongside other metrics like cash flow, risk assessment, and strategic alignment to get the full picture.

ROI for specific business activities

Marketing ROI measures how effectively your marketing spend generates revenue, a critical task considering global spending on media was projected to hit $2.1 trillion. Use it to evaluate campaigns, channels, and tactics.

Key metrics to track:

• customer acquisition cost (CAC): how much you spend to gain each new customer
• return on ad spend (ROAS): revenue generated per rand spent on advertising
• conversion rate: percentage of visitors who take a desired action

Sales ROI helps you assess which sales strategies, promotions, and customer segments deliver the best returns.

Key metrics to track:

• sales growth rate: percentage increase in sales over time
• average order value (AOV): average amount customers spend per transaction
• customer lifetime value (CLTV): total revenue a customer generates over their relationship with your business

Project ROI evaluates whether a new initiative is financially viable before you commit resources.

Key metrics to track:

• net present value (NPV): the current value of future cash flows minus the initial investment
• internal rate of return (IRR): the expected annual growth rate of the investment

Employee ROI measures the value your team generates relative to hiring, training, and development costs.

Key metrics to track:

• revenue per employee: total revenue divided by number of employees
• employee turnover rate: percentage of staff who leave within a given period
• employee engagement: how motivated and committed your team is

How to improve your ROI

Improving ROI comes down to setting clear targets, tracking results, and adjusting your approach. Here's how to get started:

1. set clear goals: define specific, measurable objectives for each investment
2. track results regularly: monitor performance weekly or monthly to spot trends early
3. use accounting software: tools like Xero provide the data you need to measure what's working
4. let ROI guide decisions: prioritise investments that consistently deliver strong returns
5. experiment and adjust: test new approaches and refine your strategy based on results. For instance, L'Oréal boosted digital marketing efforts by shifting its online ad spend from 50 to 70 percent of its budget after projecting that half its sales would come from online channels.

Additional considerations for small businesses

Small businesses should weigh several factors when evaluating investment returns.

Time frame

The same ROI percentage can mean very different things depending on how long the investment took.

For example, compare these two investments:

• A marketing campaign with 25% ROI over one year
• Equipment purchase with 25% ROI over two years

The marketing campaign delivered the same return in half the time, making it more efficient. Consider calculating ROI over different periods (monthly, quarterly, annually) to match your business goals.

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

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 maximise ROI.

Use Xero to track ROI with confidence

Understanding ROI helps you evaluate how decisions affect profitability and make smarter choices in the future. But ROI works best alongside other metrics like cash flow and profit margins.

Xero's real-time reporting makes it easy to track ROI across campaigns, projects, and business activities. See your numbers clearly, spot trends early, and make confident decisions.

Get one month free and start tracking your ROI today.

FAQs on ROI

Here are answers to common questions about ROI for small businesses.

What's a good ROI for a small business?

A good ROI exceeds your cost of capital and aligns with industry benchmarks. Consult your financial advisor to find averages for your sector.

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

It depends on the investment type. Marketing campaigns may show returns within weeks, while equipment purchases or employee training often take months or years to pay off.

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) and use those insights to improve future decisions.

What does a 20% ROI mean for my business?

A 20% ROI means you earned R0.20 for every R1 you invested. For example, if you spent R5,000 on a marketing campaign and generated R6,000 in profit, your ROI is 20%. This helps you compare the effectiveness of different investments.

Should I focus on ROI or other metrics like cash flow?

ROI is important, but it's not the only metric that matters. Small businesses should also track cash flow, profit margins, and customer acquisition costs. Use ROI alongside these metrics to get a complete picture of your financial health.