Return on investment (ROI) measures how much profit an investment produces compared to what it cost. You calculate it by dividing the net gain by the amount invested, then multiplying by 100 to get a percentage. A positive ROI means the investment earned more than you put in.
You will use ROI in two places. First, when you compare options: a €5,000 machine and a €5,000 ad campaign compete for the same money. Second, when a lender or investor asks what their money buys. A generated business plan states the expected ROI in the financial section for exactly that reason.
An example. You spend €4,000 on a website. Over twelve months it brings 80 extra orders with an average profit of €95 each, so €7,600 in profit. The net gain is €7,600 minus €4,000, which is €3,600. ROI is €3,600 divided by €4,000, so 90 percent over one year.
Three mistakes come up often. First, founders use revenue instead of profit. If those 80 orders produced €7,600 in revenue and the goods cost €5,000, the real gain is negative. Second, they skip the time period. 90 percent in one year and 90 percent in five years are very different results, so always name the period. Third, they forget their own labour. If you spent 60 hours building that website yourself, those hours have a value, even when no money left your account.
ROI works well for a single, separable decision. It works poorly for spending you cannot isolate, such as brand awareness or your own training.
