What is ‘Return on Investment?’
Still trying to wrap your head around the concept of return on investment? Whether you are a professional accountant or business owner (or both), this is a term that you’ll probably hear quite frequently during your day-to-day operations. So, what exactly is return on investment? And how does is it used in accounting? To learn more about return on investment, keep reading.
Return on investment can best be described as the profits generated from one or more investments. It’s typically expressed as a percentage, and used to evaluate the performance of marketing and advertising campaigns. Return on investment can be either positive or negative, depending on whether or not the investment generating more revenue than what the business owner paid for it. If the investment generated less revenue than what the business owner paid for it, he or she will experience a negative return on investment. But if the investment generated more revenue than what the business owner paid for it, he or she will have a positive return on investment.
Here’s a scenario to consider: you are a small business owner who recently spent $2,000 on a TV commercial advertisement. Assuming that commercial was directly responsible for generating $3,000 in revenue, you can count that marketing campaign as having a 150% return on investment. If it generated $2,000 in direct revenue, on the other hand, the campaign would have a 100% return on investment, meaning you essentially broke even. Anything less than $2,000 would be less than 100%, indicating a negative return on investment.
Return on investment is arguably one of the most important metrics for business owners and accountants to consider, as it provides an overview of profitability per each investment. Analyzing your return on investment on a regular basis will allow you to optimize your advertising and marketing campaigns for better performance. And when these campaigns perform better, you’ll reap the benefits of more profits. It’s just that simple.
Return on investment can be identified through other means than just financial gain, however. Normally, business owners and accountants focus this metric strictly around profits, but it can also be used to identify and measure other key performance indicators (KPI), such as social value or brand recognition. Using return on investment to measure other metrics such as this can prove a bit more complicated, but nonetheless it’s still a common tactic used by many business owners and accountants.
Did this give you a better understanding of return on investment? Let us know in the comments section below!