What is ROI?
When someone in business talks about their ROI, they mean their Return On Investment. A savvy business person will want to know all about the ROI of a project, because it tells him or her how successful it is. ROI is usually a matter of simple mathematics, although it can involve a number of different factors.
Any expense that a company has can be calculated in terms of ROI. Some expenses may not have any direct ROI, or their ROI might be zero. Buying a new stapler, replacing a broken printer, or repainting a room doesn't produce any revenue, so these expenses don't have any ROI. For this reason, ROI is not customarily used to discuss these types of expenses, even thought they could be considered investments in the company.
A more common use for ROI might be something like an ad campaign. Buying ad space in a newspaper, hiring a graphic designer to create the ad, and paying a photographer to take pictures of your product all cost money. This is your investment in the ad campaign. In order to determine your ROI, you need to figure out how much money your company will make because of this campaign.
Figuring out the return on a project like this can be difficult. The company might determine its average income before the ad campaign, and then again after and look for any difference. In this case, other factors might come into play. The economy may have changed for example, so this is not a completely accurate method. Asking clients where they heard about your product can prove useful to approximate how many new clients were encouraged by the ad. A client who already intended to buy the product might have seen the ad on the way to the store, so this is not a foolproof method either.
Because ROI is often not a precise measurement, an approximate figure is usually sufficient. The more accurate the better, but some error is expected. ROI is most often used as a comparison between different investment options.
If a print ad campaign has created a very large ROI in the past, while a radio ad campaign did not work well for this particular business, it might be a better investment of resources to continue the print campaign. On the other hand, if a television ad is predicted to have an even larger ROI than the print ad, that could turn out to be the most profitable investment of the three. For a business savvy professional, using ROI to compare options is one of the keys to running a profitable business.
@ ValleyFiah- ROI can be a deceiving financial ratio. Many different calculations can be used to determine return on investment, allowing people to skew numbers in their favor. This is one way that someone can create an enticing investment that is in fact not that good. ROI can be used to skew the risk/reward relationship to sucker investors into a bad investment. For this reason, one should always understand an investment. Investments should also be simple, allowing accurate projections of ROI and other financial ratios.
The ROI is important in any type of investment. It is one aspect of the risk/reward of an investment. An investment that involves little risk will have little reward, but a larger risk by the investor should lead to a larger reward in the form of an ROI.
This risk/reward relationship can also play tricks on people. People can make poor investment decisions because the risk is too high, and the reward is not realistic. It is always a good idea to know what you are investing in so you can take calculated risks.
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