ROI Calculator

How to use the ROI calculator

1. Amount invested: enter everything you paid to make the investment happen. For an ad campaign that is the ad spend plus design and tools. For equipment it is the price plus delivery and set-up.
2. Amount returned: enter the total you got back, or what the thing is worth today. If the money went on a business expense, use the profit it produced after direct costs, not the sales it brought in.
3. Time period: enter how many years the money was tied up. Use 0.5 for six months or 0.25 for three months.

The result updates as you type. You get the ROI as a percentage, the net gain or loss in dollars, how much came back for every $1 you put in, and the annualized ROI.

The ROI formula

The first formula is the standard simple ROI. It tells you how much you gained for the money you put in, but not how long it took. The second formula is the compound annual rate: the steady yearly return that would turn your starting amount into your ending amount over the period. When the period is exactly one year, the two numbers are the same.

A worked example

Say you spend $8,000 on equipment and a first batch of stock for a weekend market stall. Two years later, the profit from the stall plus the resale value of the equipment adds up to $10,000.

The same 25% looks very different once you change the time. Over 1 year the annualized ROI is 25%. Over 5 years it falls to 4.6% a year. And if the stall had returned only $6,000 over the two years, the ROI would be -25% and the annualized ROI -13.4% a year.

How to read your ROI as a founder

There is no single ROI that counts as good. The useful question is what else you could have done with the same money and time. Compare the result with your next option, not with zero.

• Count profit, not sales. If $1,000 of ads brings in $3,000 of sales but the goods cost you $2,200 to supply, the return is $800 and the ROI is negative. Check your profit margin first.
• Count your time. An ROI that only works because you worked unpaid for six months is not the same as one where you were paid. Put a price on your hours and add it to the amount invested.
• Use it on small tests before big bets. Run a cheap test, measure the return, then decide whether to spend more. This is the same logic as validating a startup idea before you build it.
• For marketing spend, look at the customer too. ROI on one campaign misses repeat purchases. Customer acquisition cost and the CAC payback period show how long each customer takes to earn back what you spent to win them.
• For a whole business, start with the costs. List what you need to spend with the startup cost calculator, then find the sales level where you stop losing money with the break-even calculator.

What the calculator leaves out

• Risk. Two investments can show the same ROI while one of them could easily have lost everything. ROI describes what happened or what you expect, not how likely it is.
• Timing of cash inside the period. The annualized figure assumes one payment in at the start and one amount out at the end. If money goes in and comes back in stages, a month-by-month cash flow forecast is more accurate.
• Taxes and inflation. Results are before tax and are not adjusted for rising prices. Tax rules differ by country and by type of income, so ask an accountant how your gain would be taxed.
• Returns you cannot price. What you learned from a failed test, or a customer relationship that pays off later, will not show up here.

If you are using ROI to decide whether a business idea is worth starting, the number is only as good as your guesses about sales and costs. A written plan forces you to check those guesses. You can read example plans at the business plan generator.