Operational
Return on Investment (ROI)
Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment relative to its cost. It measures the return generated on an investment as a percentage of the investment's cost, providing crucial insights into the value gained from business expenditures.
HOW TO MEASURE
ROI is calculated by dividing the net profit (or benefit) from an investment by the cost of the investment, then multiplying the result by 100 to express it as a percentage.
HOW TO IMPROVE
Optimize Costs: Reduce expenses associated with the investment without compromising quality to improve returns.
Increase Efficiency: Enhance processes and utilize technologies that maximize output and minimize waste.
Strategic Planning: Choose investments with a high potential for returns based on thorough market and risk analysis.
Performance Monitoring: Continually assess and adjust strategies based on performance metrics.
FORMULA
ROI = ( Net Profit from Investment−Cost of Investment / Cost of Investment ) × 100%
EXAMPLE
A company spends $20,000 on a new marketing campaign and generates an additional $50,000 in sales. The ROI would be: ROI=(50,000−20,000/20,000)×100%=150%. This indicates that for every dollar spent on the campaign, the company gained $1.50 in return.
DEPARTMENT USAGE
Finance: To assess financial performance and guide investment decisions.
Marketing: To evaluate the effectiveness of marketing campaigns and strategies.
Sales: To analyze the profitability of sales initiatives and strategies.
Leadership: For strategic decision-making based on financial health and investment performance.
View the collection of Metrics Workshops.