Knowing that the money you’re spending on your business is getting you the returns you need is incredibly important for any business, and IT businesses are no exception. Whether it’s the money you spend on services, internal employees, marketing activities, tools and software, or equipment, the return you’re getting on that investment is what determines if these business activities are good for business.
In order to determine this, you’ll need to calculate the ROI of your business regularly and across different departments.
If you’re looking to understand ROIs and how measuring them can impact your business, you’re in luck! Here’s everything you need to know about ROIs:
What is ROI?
ROI, short for return on investment, and it refers to a metric used to measure how efficient an investment is or how profitable it is considering the amount of money that was spent on that investment. ROIs measure the ratio of your profit in relation to the investment’s spend, which gives you a quick look into whether that investment has had a negative or positive impact on the business.
In simpler terms, your ROI is a way to measure how much profit you’re getting from any investment you’ve made.
Why you should calculate your ROI
Your ROI gives you a lot of insight into your IT business and is in fact crucial to sustaining it. Here are the three main reasons you should calculate your ROI:
It help you make correct financial decisions
The most important advantage you get by calculating your ROI is that it helps you reduce expenses and increase profit. By calculating the profit made through every action your business has made, you’re able to identify what business activities are not generating profit and therefore need to be stopped, and what business activities warrant a higher investment to get an even higher return in the long run.
It helps your IT business grow
By calculating ROI, you’re able to identify business ventures that are profitable and follow the evolution of your investments. Besides just identifying the importance of each individual investment, calculating ROI allows you to identify standards that help your IT business’s performance improve, which in turn contributes positively to your business’s evolution.
Easier and safer business decision-making
By following the historical measurements of your company’s ROI, you’ll be able to identify which investments have worked in the past and follow patterns that allow you to choose your future investments safely.
How to calculate ROI
While there are several variations of the formula to calculate it, ROI as a financial ratio is most commonly calculated by dividing the net income by the original capital cost of the investment.
The two most common formulas to calculate your ROI are:
- 1. ROI = Net Income / Cost of Investment
- 2. ROI = Investment gain / Investment Base
For example, let’s say you’ve subscribed to a software that helps your team fix IT issues faster, and the software costs a monthly fee of 5,000 GBP. This software allows your team to take on additional clients in the same timeframe, and therefore increases your monthly profit by 20,000 GBP.
To calculate the ROI on this software, you’d divide the increase in profit by the amount you’ve invested to get this software:
ROI = 20,000 / 5,000 GBP = 4:1 or 200%
How do you know if your ROI is good?
Now that you know how to calculate the number, you’ll need to know what that number means, and whether or not it’s a good ROI for each business unit.
Good ROI for Small Businesses
What’s good for an established business might not necessarily be good ROI for a small business. While a large corporation might find an annual ROI of 10% sufficient, small businesses should have a different goal and aim for a higher ROI.
Determining the right ROI for your business depends heavily on your business practices and the amount of profit you need to make to sustain your business. As a small business, you’ll likely take on more risks as opposed to a larger, more comfortable, business. Since a smaller
business’s activities are generally riskier, the same ROI a large business would aim for would not be sufficient for a small business.
Most business experts recommend an ROI of 15 – 30% annually for small businesses.
Good ROI for Marketing
that a good marketing ROI would be 5:1. An ROI of 10:1 would be considered exceptional, but not necessary for your marketing ROI to be sustainable and profitable. In fact, any ROI ratio between 5:1 and 10:1 would be considered above average, and profitable enough for it to be worth maintaining.
Most experts agree that an ROI of 2:1 would usually not be profitable. This because the cost of producing the advertised good would usually amount to half the price of the sold good. This cost, together with the marketing cost, would result in little to no revenue. If your ROI is 2:1 or less, you’ll need to pay additional attention to your marketing strategy and aim to increase the ratio to at least 5:1.
Pro-tip : Each department in your company should calculate their own ROI. That should give a clearer picture as to how your company is performing overall. Different departments should have different goals for their ROI – what’s considered a good ROI ratio for marketing may not be considered a good ROI for other departments.
Calculating your ROI and setting the right goals matters for any business and especially for an IT business in 2021. Remember the importance of setting and calculating your ROI: making correct financial decisions, making safe business decisions, and helping your business grow and maximising profits.
Make sure you keep an eye on your historical ROI, learn from it and make correct decisions as your business grows. Armed with all of this information, your IT business can grow and prosper as long you pay attention to your ROI ratios, and aim for a ratio that is ambitious yet realistic at the same time.