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.
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?
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.
Aside from financial decisions, where can you use the concept of ROI in your business? Let’s look at a few areas: