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Return on Investment (ROI)

If you're investing in things like equipment or advertising, it's important to know what you'll get out of the investment. The percentage of what revenue the investment brought your business is called Return on Investment.

ROI a pretty simple formula. You take the revenue generated from the investment and subtract the cost of the investment, then divide that number by the cost of the investment:

  • ROI = (Revenue generated from Investment - Investment) % Investment

An example of analyzing ROI on an equipment purchase might look like this: You're a landscaper, and you just bought a new stump grinder because you've gotten a few calls about stump removal. The stump grinder costs $2,000, and over the course of six months, you do 20 stump grinding jobs totaling $5,000. The calculation would look like this:

  • $2,000 investment
  • $5,000 in revenue as a result
  • ($5000 - $2000) % $2000
  • Your ROI is 150%

The ROI tells you that you've made a decent return in the six months that you've had the stump grinder.

Another example using an advertising investment: If you spend $2000 on a billboard to advertise your company, but you only receive $1000 from the jobs as a result of that billboard, you didn't receive a positive return on your investment, and you probably shouldn't make that investment again, at least not without making changes.