For example, let's say you bought a new lawnmower for $2,000 to start a gardening business. At the end of the year, you’ve made a profit of $20,000 from mowing lawns. 

To calculate your ROI, you would divide the profits ($20,000 - $2,000 = $18,000) by the initial investment ($2,000), which gives you 9. Multiplying this by 100 gives you 900%. This means for every dollar you spent on the lawn mower, you received $9 in profit.

ROI calculations become more complex for bigger businesses, but the power of the ROI metric is its versatility. It can be used to analyze any specific project, campaign or investment. You can apply this formula to the entire business, a part of it or both. Additionally, it allows you to assess past decisions and plan for the future.

In practice, getting your ROI right requires taking into account all relevant income and costs associated with an investment. This may include less obvious items like costs associated with loans, professional fees and training.

Getting together all the information you need isn’t easy. If you account for your business on a cash basis, business tools such as our cash flow calculator can help you quantify amounts to include in your ROI assessment. Even if you account on an accruals basis, our calculator can still provide a useful starting point to identify relevant incomings and outgoings.

• Introducing a new product or service. A bigger product range can bring in more sales, but it could also increase your costs. Calculating the ROI of a new offering can help you understand how its profitability compares with existing products
• Hiring additional employees. ROI can help you assess how much an employee is contributing to the profitability of the business and compare performances between individuals, so you can make better hiring decisions in future.
• Evaluating sales channels. Having different ways to sell your products can potentially expand your market reach and boost sales volume. By measuring the ROI for different sales channels — online, in-store, direct to customers or wholesale — you can identify channels that drive profits and optimize your resource allocation.

• ROI ignores time. ROI doesn’t take into account the period of time it takes to generate returns. This can make it difficult to evaluate investment performance. For instance, a 50% return on business equipment might seem more or less impressive depending on whether the returns were generated over a month or a year. If you’re choosing between different investments or purchases, consider annualizing ROI or using net present value (NPV) analysis for more meaningful comparisons.
• Tying revenue to investment can be difficult. It can be hard to link a sale (and therefore income from the sale) to a specific investment — this is particularly the case for marketing spend like ads or social media campaigns.
• Overlooking hidden factors. Less obvious considerations such as indirect costs and even emotional stress can affect ROI but are difficult to take into account.
• ROI changes. Like other profitability ratios, ROI changes in line with underlying variables. Therefore, you need to update calculations regularly to maintain an accurate picture of investment outcome.

An investment with a positive ROI is contributing to your profits, whereas one with a negative ROI is depleting your bottom line. 

Since ROI can be calculated for various types of businesses, expenditure and investments, there isn’t a simple percentage that makes a return “good” or “bad”. That said, the higher the ROI, the more you’re getting back from the money you put in — so a high percentage is generally better — but you have to consider the period of time it takes to generate the return too. 

In a business context, interpreting ROI accurately requires that you analyze results against similar operations. In the end, what is a good ROI for a small company might not be so good for a bigger one. ROI expectations also vary significantly across industries.