Calculating your return on investment is an essential part of determining the viability of your operations. If you're starting a business, investors will want to see projections for your profitability going forward. If your company is more established, ROI determines which areas of your business are thriving and which aren't performing up to their potential. To calculate ROI, you'll need some basic financial information and a spreadsheet or calculator.
Use your cash flow to calculate ROI, rather than revenue. Because the initial investment generally is made in cash, measuring the actual cash that investment helps generate is the most accurate way of determining ROI.
Basic ROI Calculation
Start by setting up entries for the period or periods under consideration. If you're just looking at one year, this will be a short entry, but multi-year ROIs will require a separate area for each year. For each year, include the investment as a negative number. That's because it's a net negative -- investors are sending you their money or you're contributing the capital -- it's not coming from your earnings.
Next, detail the amount of earnings you expect over that same period. This can be an estimate if you're projecting ROI for a startup, but most potential investors will want to see some rigor behind your projections. If the calculations aren't based on actual data, you'll want to include a footnote that indicates how you came up with the figures. Industry averages, previous business operations, or some other justifications will provide reassurance that you're considering what's likely to occur rather than simply what you hope for.
Add the investment and the earnings to get a total. Ideally, this will be a positive number, meaning that your earnings exceed the investment. However, negative cash flow may be a more likely scenario in the first years of a new business.
Divide the earnings by the investment to get the ROI.
A business may determine its total ROI by dividing its after-tax income by net worth.