How can small businesses apply the concept of return on investment (ROI)?In the French-speaking world, roi literally means king. But in the business world, ROI — return on investment — is king too.Unless you’re big into finance, marketing, or a similar field, you might not have given this concept much thought. When I first started my business, I didn’t approach my decisions that way. My philosophy went something like this: Put time/money into advertising/working/networking/contacting clients, etc. Eventually, business grows.
Or, expressed even simpler:Time in + money in = business success.The problem is, this formula only works on the right investments of your time and money. If you choose the wrong things, then time + money spent on business = broke.This is where return on investment comes into play.
What Is ROI?
Put briefly, ROI is a way to measure how well your decisions perform. Often, it’s used in a financial context, such as in this article from Investopedia. In its most basic form, you calculate ROI by dividing the return on your investment by the cost of the investment.
If you invest $100 and you get $120 back on your investment, you’ve gotten a 20% return on your investment.However, ROI isn’t always that simple. This is because the return on investment concept is used in areas well outside of finance. For example, the ROI Institute lists over 20 different areas, from regulatory compliance to fitness and health, where this concept can be applied.
So, let’s think of ROI as what you put into something and what you get back, rather than as a simple numeric formula. How can it help your business?
The Pareto Principle: Another Business Favorite
Let’s briefly digress into another favorite business-meets-math area: the Pareto principle. In short, this principle posits that 80% of your results come from 20% of your work.
Logically, then, if you focus your time on that top 20%, you’ll benefit more than you would in slogging through the 80% details. (For a detailed analysis of this idea, see this Forbes article.) So, that 20% of your time (or 20% of your customers, products, etc.) is where you’re getting a high ROI.
Indirect Ways to Use the ROI Principle in Your Business
Aside from financial decisions, where can you use the concept of ROI in your business? Let’s look at a few areas:
- Community goodwill. If you volunteer in your community or support it in some tangible way, you’ll be spending time and most likely money. Now, you probably won’t see a direct dollar amount coming back at you for this, but you will be building up your local presence. You may even get some indirect business. Either way, community involvement is almost universally applauded as a good investment.
- Taking care of your staff. From the cost of hiring and onboarding a new recruit to upskilling a promising employee, there’s no doubt that workers cost money (and that’s beyond pay and benefits). But investing in quality staff members is good for your business: not only do they represent you, they are also helping you thrive.
- Outsourcing challenging tasks. Your time is valuable. Why use it to tackle things that you can assign to someone else — especially if someone else can get it done more efficiently? Managed IT, like what we offer at Techsperts, is an excellent example of a return on your investment. In this case, the return isn’t necessarily in money; it’s in terms of more time and less stress!Before any decision, from optimizing your website to reshaping the services you offer, consider the ROI. How much time and money will go into it? How much financial return will you get from your investment? What intangible returns — such as time, goodwill, and productivity — can you expect from it? This information will give you a clearer picture of the outcomes you can expect.