Business Finance

ROI Best Practices

An ROI calculation is an effective decision-making tool for business owners. But where should you apply ROI analysis in your business and which decisions absolutely require the application of ROI methodology? The answer might surprise you.

Sound business ownership requires the application of careful analysis and decision-making skills.

Although ROI analysis can be a valuable resource, it's important to understand ROI methodology and calculation techniques before you use ROI as the basis for major business decisions.

The basic ROI percentage formula is (Benefit-Cost)/Cost*100. Sounds simple, right? Not necessarily. The tricky part of ROI can be forecasting and quantifying the benefits and costs. The more effort you invest in establishing accurate benefit and cost values, the more useful ROI analysis will be for your company.

Many business owners limit ROI analysis to major purchases. But once you've mastered basic ROI methodology, you can apply ROI analysis to almost every decision you make as a business owner. Here are just a few of the areas where ROI should play a role in your business.

• Strategic planning. Strategic planning creates a roadmap and guides your company's decision-making processes. When you create your strategic plan, it's helpful to use ROI analysis to determine which objectives are most helpful in achieving your goals.
• Operations. ROI is invaluable in evaluating efficiency targets for business operations. If there is a way to produce products more inexpensively, ROI analysis will find it – but only if you are intentional about incorporating ROI into operational management and monitoring.
• Tech upgrades. Most business owners are inundated with offers for technology solutions that promise outrageous ROI. Don't take software and hardware vendors' word about ROI – conduct your own analysis and determine whether an upgrade will actually deliver a level of return that justifies the expense.
• Sales & marketing. It's essential to conduct ROI analysis for your company's sales and marketing campaigns. Estimating the benefit from a marketing campaign can be difficult, but with the assistance of marketing professionals, you should be able to create accurate sales estimates for every marketing campaign your organization rolls out.
• Customer service. Whether you know it or not, customers perform an informal ROI analysis in their relationship with your brand. A successful customer service program uses ROI to gauge and improve customer loyalty and connection.
• Social media. Social media marketing is gaining steam in the small business community. Evaluating the ROI of social media initiatives is challenging because most social media sites are free. But to determine ROI, you'll need to include the cost of labor hours your business spends connecting with customer through social media channels.

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