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Return on investment - Wikipedia


Return on investment - or ROI - represents the financial benefit received from an investment. It's used in many areas of finance, as well as in business. In business, it's used a great deal to measure the effectiveness of marking, although that's not the only area you can measure ROI. Other business investments such as equipment and services should have a favorable ROI.

The goal is to have a high ROI, which is indicative of your investment leading to gains. It is usually represented as a ratio and obtained by dividing the gain earned from the investment by the investment amount. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, you divide $2,000 by $1,000 to get $2. The ROI would then be $2 or 2 to 1. In other words, for every $1 you spend on PPC ads, you earn $2. You should measure ROI on all you marketing efforts so you can be sure to spend your time and money on activities that generate the best results.

The difficulty in calculating ROI lies in how well revenues can be tied to a specific investment. For example, if you engage in a search engine optimization (SEO) campaign, you may not be able to accurately determine how much an increase in your revenues was a direct result of that campaign because other factors (i.e. social media) may also have led to increased traffic.

Additionally, because you're dividing by your expense, if you engage in a free promotional activity that results in increased sales, the denominator would be zero, which results in a mathematical error. With that said, free marketing often involves the personal investment of time, which does have a financial value, and you can use that to determine ROI. For example, if you know your time is worth $50 an hour and you spend an hour a day on social media, you can divide the income earned from your social media efforts (if you can decipher that amount) by $50. 

Anytime you invest money (or time) into your business, you need to have a goal result in mind and way to measure it to insure you're receiving a gain. Ask yourself, "What will I earn by investing this time and money into my business?" For example, if you outsource work to a virtual assistant, is the money you're paying to a VA leading to gains in income and if so, how much (ROI).

ROI isn't static. Many variables can change your ROI. For example, even if you don't change anything about the PPC ads, it's possible they could drop in ROI (not perform as well) or improve (generate better results). So you want to calculate ROI regularly and make changes to your investments as needed.

In fact, several different metrics are called return on investment, or ROI, but the best known is the cash flow metric defined here as Simple ROI or the Return on Investment Ratio .

Simple ROI compares returns to costs by making a ratio from cash inflows and outflows that follow from the investment. By definition, the ROI ratio calculates as net investment gains divided by total investment costs.

ROI has become popular in the last few decades as a general purpose metric for rating capital purchases, projects, programs, and initiatives, and also investments in stock shares and the use of venture capital. Because the metric is popular and widely used, however, decision makers and analysts should remember that many who produce ROI figures have a poor grasp of the metric's weaknesses and unique data needs. With ROI figures from an unknown source, therefore, the wise decision maker will also ask to see the source data for those results.

Some analysts say that simple ROI measures profitability . While that statement is accurate and useful, other businesspeople borrow a term from the field of economics and say that ROI means efficiency . That usage is arguably less useful because many people use the same term—efficiency—to describe the meaning of quite a few other metrics, including Internal rate of return IRR , payback period , inventory turns , and return on capital employed ( ROCE ).

Sections below further define, explain, and illustrate return on investment ROI . Note especially that the term appears in context with related terms and concepts, from the fields of business analysis, investment analysis, and finance. The following issues receive special emphasis:

The simple ROI metric answers these questions by making a ratio (or percentage), showing directly the size of net gains relative to the size of total costs.

Return on investment, or ROI, is a mathematical formula that investors can use to evaluate their investments and judge how well a particular investment has performed compared to others. An ROI calculation is sometimes used along with other approaches to develop a business case for a given proposal. The overall ROI for an enterprise is sometimes used as a way to grade how well a company is managed.

This complimentary document comprehensively details the elements of a strategic IT plan that are common across the board – from identifying technology gaps and risks to allocating IT resources and capabilities. The SearchCIO.com team has compiled its most effective, most objective, most valued feedback into this single document that’s guaranteed to help you better select, manage, and track IT projects for superior service delivery.

If an enterprise has immediate objectives of getting market revenue share, building infrastructure, positioning itself for sale, or other objectives, a return on investment might be measured in terms of meeting one or more of these objectives rather than in immediate profit or cost saving.

For example, take a person who invested $90 into a business venture and spent an additional $10 researching the venture. The investor's total cost would be $100. If that venture generated $300 in revenue but had $100 in personnel and regulatory costs, then the net profits would be $200.

Because ROI is most often expressed as a percentage, the quotient should be converted to a percentage by multiplying it by 100. So this particular investment's ROI is 2 multiplied by 100, or 200%.

Compare that to another fictitious example: An investor put $10,000 into a venture without incurring any fees or associated costs. The company's net profits were $15,000. The investor made $5,000. It's significantly more than the $200 in net profits generated in the first example. However, the ROI offers a different view: $15,000 divided by $10,000 equals 1.5. Multiplied by 100 yields an ROI of 150%.

Return on investment - or ROI - represents the financial benefit received from an investment. It's used in many areas of finance, as well as in business. In business, it's used a great deal to measure the effectiveness of marking, although that's not the only area you can measure ROI. Other business investments such as equipment and services should have a favorable ROI.

The goal is to have a high ROI, which is indicative of your investment leading to gains. It is usually represented as a ratio and obtained by dividing the gain earned from the investment by the investment amount. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, you divide $2,000 by $1,000 to get $2. The ROI would then be $2 or 2 to 1. In other words, for every $1 you spend on PPC ads, you earn $2. You should measure ROI on all you marketing efforts so you can be sure to spend your time and money on activities that generate the best results.

The difficulty in calculating ROI lies in how well revenues can be tied to a specific investment. For example, if you engage in a search engine optimization (SEO) campaign, you may not be able to accurately determine how much an increase in your revenues was a direct result of that campaign because other factors (i.e. social media) may also have led to increased traffic.

Additionally, because you're dividing by your expense, if you engage in a free promotional activity that results in increased sales, the denominator would be zero, which results in a mathematical error. With that said, free marketing often involves the personal investment of time, which does have a financial value, and you can use that to determine ROI. For example, if you know your time is worth $50 an hour and you spend an hour a day on social media, you can divide the income earned from your social media efforts (if you can decipher that amount) by $50. 

Anytime you invest money (or time) into your business, you need to have a goal result in mind and way to measure it to insure you're receiving a gain. Ask yourself, "What will I earn by investing this time and money into my business?" For example, if you outsource work to a virtual assistant, is the money you're paying to a VA leading to gains in income and if so, how much (ROI).

ROI isn't static. Many variables can change your ROI. For example, even if you don't change anything about the PPC ads, it's possible they could drop in ROI (not perform as well) or improve (generate better results). So you want to calculate ROI regularly and make changes to your investments as needed.

In fact, several different metrics are called return on investment, or ROI, but the best known is the cash flow metric defined here as Simple ROI or the Return on Investment Ratio .

Simple ROI compares returns to costs by making a ratio from cash inflows and outflows that follow from the investment. By definition, the ROI ratio calculates as net investment gains divided by total investment costs.

ROI has become popular in the last few decades as a general purpose metric for rating capital purchases, projects, programs, and initiatives, and also investments in stock shares and the use of venture capital. Because the metric is popular and widely used, however, decision makers and analysts should remember that many who produce ROI figures have a poor grasp of the metric's weaknesses and unique data needs. With ROI figures from an unknown source, therefore, the wise decision maker will also ask to see the source data for those results.

Some analysts say that simple ROI measures profitability . While that statement is accurate and useful, other businesspeople borrow a term from the field of economics and say that ROI means efficiency . That usage is arguably less useful because many people use the same term—efficiency—to describe the meaning of quite a few other metrics, including Internal rate of return IRR , payback period , inventory turns , and return on capital employed ( ROCE ).

Sections below further define, explain, and illustrate return on investment ROI . Note especially that the term appears in context with related terms and concepts, from the fields of business analysis, investment analysis, and finance. The following issues receive special emphasis:

The simple ROI metric answers these questions by making a ratio (or percentage), showing directly the size of net gains relative to the size of total costs.

Return on investment - or ROI - represents the financial benefit received from an investment. It's used in many areas of finance, as well as in business. In business, it's used a great deal to measure the effectiveness of marking, although that's not the only area you can measure ROI. Other business investments such as equipment and services should have a favorable ROI.

The goal is to have a high ROI, which is indicative of your investment leading to gains. It is usually represented as a ratio and obtained by dividing the gain earned from the investment by the investment amount. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, you divide $2,000 by $1,000 to get $2. The ROI would then be $2 or 2 to 1. In other words, for every $1 you spend on PPC ads, you earn $2. You should measure ROI on all you marketing efforts so you can be sure to spend your time and money on activities that generate the best results.

The difficulty in calculating ROI lies in how well revenues can be tied to a specific investment. For example, if you engage in a search engine optimization (SEO) campaign, you may not be able to accurately determine how much an increase in your revenues was a direct result of that campaign because other factors (i.e. social media) may also have led to increased traffic.

Additionally, because you're dividing by your expense, if you engage in a free promotional activity that results in increased sales, the denominator would be zero, which results in a mathematical error. With that said, free marketing often involves the personal investment of time, which does have a financial value, and you can use that to determine ROI. For example, if you know your time is worth $50 an hour and you spend an hour a day on social media, you can divide the income earned from your social media efforts (if you can decipher that amount) by $50. 

Anytime you invest money (or time) into your business, you need to have a goal result in mind and way to measure it to insure you're receiving a gain. Ask yourself, "What will I earn by investing this time and money into my business?" For example, if you outsource work to a virtual assistant, is the money you're paying to a VA leading to gains in income and if so, how much (ROI).

ROI isn't static. Many variables can change your ROI. For example, even if you don't change anything about the PPC ads, it's possible they could drop in ROI (not perform as well) or improve (generate better results). So you want to calculate ROI regularly and make changes to your investments as needed.

Return on investment - or ROI - represents the financial benefit received from an investment. It's used in many areas of finance, as well as in business. In business, it's used a great deal to measure the effectiveness of marking, although that's not the only area you can measure ROI. Other business investments such as equipment and services should have a favorable ROI.

The goal is to have a high ROI, which is indicative of your investment leading to gains. It is usually represented as a ratio and obtained by dividing the gain earned from the investment by the investment amount. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, you divide $2,000 by $1,000 to get $2. The ROI would then be $2 or 2 to 1. In other words, for every $1 you spend on PPC ads, you earn $2. You should measure ROI on all you marketing efforts so you can be sure to spend your time and money on activities that generate the best results.

The difficulty in calculating ROI lies in how well revenues can be tied to a specific investment. For example, if you engage in a search engine optimization (SEO) campaign, you may not be able to accurately determine how much an increase in your revenues was a direct result of that campaign because other factors (i.e. social media) may also have led to increased traffic.

Additionally, because you're dividing by your expense, if you engage in a free promotional activity that results in increased sales, the denominator would be zero, which results in a mathematical error. With that said, free marketing often involves the personal investment of time, which does have a financial value, and you can use that to determine ROI. For example, if you know your time is worth $50 an hour and you spend an hour a day on social media, you can divide the income earned from your social media efforts (if you can decipher that amount) by $50. 

Anytime you invest money (or time) into your business, you need to have a goal result in mind and way to measure it to insure you're receiving a gain. Ask yourself, "What will I earn by investing this time and money into my business?" For example, if you outsource work to a virtual assistant, is the money you're paying to a VA leading to gains in income and if so, how much (ROI).

ROI isn't static. Many variables can change your ROI. For example, even if you don't change anything about the PPC ads, it's possible they could drop in ROI (not perform as well) or improve (generate better results). So you want to calculate ROI regularly and make changes to your investments as needed.

In fact, several different metrics are called return on investment, or ROI, but the best known is the cash flow metric defined here as Simple ROI or the Return on Investment Ratio .

Simple ROI compares returns to costs by making a ratio from cash inflows and outflows that follow from the investment. By definition, the ROI ratio calculates as net investment gains divided by total investment costs.

ROI has become popular in the last few decades as a general purpose metric for rating capital purchases, projects, programs, and initiatives, and also investments in stock shares and the use of venture capital. Because the metric is popular and widely used, however, decision makers and analysts should remember that many who produce ROI figures have a poor grasp of the metric's weaknesses and unique data needs. With ROI figures from an unknown source, therefore, the wise decision maker will also ask to see the source data for those results.

Some analysts say that simple ROI measures profitability . While that statement is accurate and useful, other businesspeople borrow a term from the field of economics and say that ROI means efficiency . That usage is arguably less useful because many people use the same term—efficiency—to describe the meaning of quite a few other metrics, including Internal rate of return IRR , payback period , inventory turns , and return on capital employed ( ROCE ).

Sections below further define, explain, and illustrate return on investment ROI . Note especially that the term appears in context with related terms and concepts, from the fields of business analysis, investment analysis, and finance. The following issues receive special emphasis:

The simple ROI metric answers these questions by making a ratio (or percentage), showing directly the size of net gains relative to the size of total costs.

Return on investment, or ROI, is a mathematical formula that investors can use to evaluate their investments and judge how well a particular investment has performed compared to others. An ROI calculation is sometimes used along with other approaches to develop a business case for a given proposal. The overall ROI for an enterprise is sometimes used as a way to grade how well a company is managed.

This complimentary document comprehensively details the elements of a strategic IT plan that are common across the board – from identifying technology gaps and risks to allocating IT resources and capabilities. The SearchCIO.com team has compiled its most effective, most objective, most valued feedback into this single document that’s guaranteed to help you better select, manage, and track IT projects for superior service delivery.

If an enterprise has immediate objectives of getting market revenue share, building infrastructure, positioning itself for sale, or other objectives, a return on investment might be measured in terms of meeting one or more of these objectives rather than in immediate profit or cost saving.

For example, take a person who invested $90 into a business venture and spent an additional $10 researching the venture. The investor's total cost would be $100. If that venture generated $300 in revenue but had $100 in personnel and regulatory costs, then the net profits would be $200.

Because ROI is most often expressed as a percentage, the quotient should be converted to a percentage by multiplying it by 100. So this particular investment's ROI is 2 multiplied by 100, or 200%.

Compare that to another fictitious example: An investor put $10,000 into a venture without incurring any fees or associated costs. The company's net profits were $15,000. The investor made $5,000. It's significantly more than the $200 in net profits generated in the first example. However, the ROI offers a different view: $15,000 divided by $10,000 equals 1.5. Multiplied by 100 yields an ROI of 150%.

Motor industry body, Institute of the Motor Industry (IMI), is calling for government to take action to address the existing shortfall in apprentices by accelerating their proposed investment in careers advice in schools.

Motor industry body, Institute of the Motor Industry (IMI), is calling for government to take action to address the existing shortfall in apprentices by accelerating their proposed investment in careers advice in schools.

Paul has wide experience in the measurement and analysis of the impact and return on investment (ROI) from training and development, bringing a unique perspective to the discipline with over 20 years in physics research, business analytics and education management.  He was the ideal choice to head the IMI ROI Programme - funded (2012/14) by the UK Commission for Employment and Skills - making and winning the economic argument for investing in skills. Paul now manages IMI’s Analytical ROI consultancy helping business gain high quality insight from isolating the bottom-line impact of training performance on productivity, efficiency and the customer experience.

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