What Is ROI In Business: Formula & Examples

It should be second nature for any business owner to ask what success looks like whenever they have to make a decision that involves committing business capital. Everything from buying a new piece of equipment to running a marketing campaign, onboarding a hire, or refurbishing a business is ultimately judged by how much value it can bring in compared to what it costs. 

Return on investment (ROI) is a way of expressing what a business gained relative to what it spent, as a percentage. This percentage makes it possible to compare very different types of spending under similar metrics of success. This guide is going to cover what ROI is, the ROI formula, a worked example using realistic business figures, what constitutes a reasonable return, how the measure applies across common business decisions, and where it falls short. 

What Is Return on Investment (ROI)?

Return on investment is exactly what it sounds like. It’s a metric used to determine how much was made from an investment compared to how much was spent or committed. That’s true for you as it is for a company worth billions of pounds. The ROI of every decision shows the value gained or lost relative to what was spent to make that investment. ROI in business is the same thing, just applied in a much broader context. It helps define the value a business gained or lost from an expenditure relative to what was spent acquiring it. That gain or loss is typically expressed as a percentage.

Expressing ROI as a percentage makes it widely applicable across every business segment, making a decision that costs £200 not so different from one that costs £200,000, as both are measured on the same scale. Every business benefits from knowing the ROI of its spending decisions, most especially SMEs, as capital can be more limited. Here are some common situations where ROI can be applied and the questions that can be asked:

• Equipment: Does new machinery generate enough additional output or revenue to justify its purchase price?
• Vehicles: Does a commercial vehicle pay for itself through increased capacity or reduced external costs?
• Marketing campaigns: Are the channels in use returning more than they cost to run?
• Staff: Does an additional employee generate enough value to cover the full cost of employing them?
• Premises and refits: Will a second location or a refurbishment drive sufficient new revenue?
• Training: Does upskilling a team improve productivity or reduce costly errors to a meaningful degree?
• Software: Does a monthly subscription save enough time or resource to justify the outlay?

NOTE: ROI can also be negative. A negative ROI isn’t a verdict on the decision, but a that shows a particular area of spending is not generating returns commensurate with its cost, and that is the kind of information a business needs to act on.

How to Calculate ROI: Formula and Worked Example

The ROI formula is pretty straightforward:

• ROI = (Net profit from the investment / Cost of the investment) x 100

In this equation:

• Net profit means the total gain from the investment minus the total cost.
• The cost should include everything involved in making the investment, not just the headline purchase price.

Let’s look at a small café in Manchester that wants to buy a second espresso machine to serve more customers during its peak morning period. Here’s a breakdown of what an actual ROI calculation would look like when done properly, with all the probable costs factored in.

Cost breakdown

• Machine purchase price: £4,200
• Installation: £350
• Staff training: £200
• First-year maintenance contract: £250

Total cost: £5,000

Let’s say the second machine allows the café to serve an additional 30 customers per day during peak hours, at an average spend of £4.50.

Over the next 250 trading days, there’ll be additional revenue of:

• 30 × £4.50 × 250 = £33,750

After accounting for the cost of goods (coffee, milk and cups) at approximately 30%, the additional gross profit is:

• £33,750 × 0.70 = £23,625

The ROI calculation would then be: Net profit from the investment / Cost of the investment) x 100

Using the figures above:

• Net profit = £23,625 – £5,000 = £18,625
• ROI = (£18,625 / £5,000) × 100 = 372.5%

While this is a great return by most standards, the quality of this figure depends heavily on the accuracy of the underlying revenue projections. Costs commonly overlooked in calculations like this include finance charges where the equipment was purchased on credit, VAT where it is not recoverable, and the opportunity cost of the floor space occupied.

What is a good ROI in business?

A universal benchmark for a good ROI does not exist. Any article or resource that suggests one percentage and says anything above it is “good” is oversimplifying things. Whether an ROI is good depends on the investment, the business and what could have been done with the money instead.

There are some factors that can help determine whether an ROI is good in a particular situation:

• Timeframe

A 20% return over one month is quite different from a 20% return over three years. ROI as a percentage says nothing about how long it took to achieve. The timeframe must always be stated alongside the figure. The two are inseparable.

• Risk

Higher-risk decisions generally need to offer a higher potential return to justify taking them. The bar for a more speculative investment is, and should be, higher than for a predictable, low-risk business expense.

• Industry margins

A business operating on tight margins, such as a food retailer, will assess ROI against a different baseline than a professional services firm with higher natural margins. What looks like a strong return in one industry may be fairly ordinary in another.

• Opportunity cost

This is perhaps the most underused consideration. Capital committed to one investment is unavailable for another. The relevant question is not only whether an ROI is positive, but whether it represents the best available use of the funds given all the alternatives at that moment.

The most grounded comparison is often context-specific to the business as a whole or a section of it. When weighing two potential investments, projecting the ROI for each over the same timeframe and against the same cost base gives a far more useful basis for decision-making than chasing an abstract benchmark.

Using ROI to Make Business Decisions

The value of ROI lies in its use as a planning tool to help guide actual spending decisions. Like any other business planning tool, it works best when used before a decision is made, rather than simply as a way of looking back at an investment to see whether it worked.

An SME can use ROI to assess whether a planned investment is worth making in the first place. Here are some scenarios that ROI is most applicable and regularly used:

• Marketing

The revenue generated from each marketing channel compared to the cost of servicing those channels can help a business quickly identify which activity is earning its keep and which isn’t, or is even losing money. 

ROAS, or Return on Ad Spend, is an important representation of this in paid marketing. It’s a metric that focuses specifically on paid advertising and shows the return generated from the money spent on ads. ROAS provides a tighter view of what each pound of ad budget directly generated.

• Equipment and Vehicles

It’s easy to overestimate the importance of an equipment upgrade or buying a new asset on the bottom line of a business. Since, these are often large capital commitments not knowing what they might bring in compared to how much they cost can make the investment difficult to assess. Projecting the expected ROI gives a clearer picture of whether the item is likely to pay for itself, and when.

For instance, a van that increases delivery capacity may seem like an obvious investment, but quantifying when it will have returned its full cost adds more rigour to the case for buying it.

• Hiring

The cost of hiring is direct and goes beyond salary alone. Employer National Insurance, onboarding and training time can all form part of the investment. The expected return takes the form of additional output, revenue or productivity.

Running an ROI projection for a potential hire makes an inherently subjective decision more structured and surfaces assumptions that might otherwise go unexamined.

• Premises and Refits

For a larger commitment such as a refurbishment or second location, it is worth calculating both ROI and the payback period. The payback period measures how long it takes for an investment to recover its initial cost, expressed in months or years rather than as a percentage. Many business owners find this more intuitive. If a £30,000 refit generates an additional £5,000 in profit per year, the payback period is three years, with a 100% ROI over that period. Both figures together give a fuller picture than either alone.

Note: In cases where an investment is financed rather than paid for upfront, the cost of that funding should also be included in the calculation. Otherwise, the ROI may look stronger than the actual return the business receives.

ROI and Other Measures: What Else to Look At

ROI does not operate in isolation. In every business context, it needs other measures to provide a fuller picture, and in some situations, another measure may be better suited to the question a business is trying to answer.

• Return on Capital Employed (ROCE)

Return on Capital Employed (ROCE) is a financial ratio that measures how efficiently a business uses its available capital to generate profit. Unlike ROI, which can be used to evaluate one specific investment, ROCE looks at the business more broadly and therefore provides a wider view of its capital efficiency. You can find more about ROCE in our article on Return on Capital Employed (ROCE).

• Payback Period

The payback period measures how long it takes for an investment to recover its original cost. While ROI focuses on the size of the return, the payback period focuses on how quickly the business gets its money back.

• ROAS

As mentioned earlier, ROAS is the marketing-specific version of ROI, focusing specifically on the revenue generated from paid advertising. It gives a more focused view of how much revenue is generated for each pound spent on advertising.

The Limitations of ROI

ROI is a practical measure, but understanding its limitations is part of using it well.

• It might ignore the timeframe

As you know, a 50% return achieved in six months is very different from a 50% return achieved over five years. The percentage alone does not capture this distinction, which is why the timeframe must always accompany the figure.

• “Profit” can be defined in different ways

Gross profit, net profit, operating profit, each produces a different ROI figure. Where two businesses are using different definitions, their results cannot be directly compared. Consistency in methodology matters considerably.

• Percentage versus absolute return

A modest, low-cost investment may produce a high percentage ROI while generating a relatively small amount of money overall. A much larger commitment might show a lower percentage but return significantly more value in absolute terms. ROI as a percentage cannot resolve this tension on its own.

• Some benefits resist quantification

Brand awareness, staff morale, customer loyalty, and long-term reputation are genuine business benefits that can result from an investment without showing up cleanly in an ROI figure. That does not make them less real. It simply defines a boundary the measure cannot cross.

These limitations define the scope of ROI rather than undermine it. Used alongside other business measures, and with the timeframe consistently stated, it remains one of the most practical tools available for comparing business spending decisions.

Conclusion

ROI is a straightforward calculation that makes very different business decisions directly comparable, provided full costs are included and the timeframe is clearly stated. But deciding that an investment is worthwhile is only part of the decision. How that investment is funded can also affect the pressure it places on the business’s cash flow, particularly where revenue varies from month to month. In that context, the structure of the funding can matter almost as much as its cost.

For example, 365 Finance’s revenue-based finance has no APR, only a single fixed cost agreed upfront, while repayments rise and fall in line with monthly revenue. For a business with variable or seasonal income, that can provide a funding structure that better reflects how money comes into the business. Understanding both the projected ROI of an investment and how it will be funded therefore gives a business owner a more complete basis for deciding whether to go ahead.