In the world of accounting, surely you often hear about return on investment (ROI) or what can be called the rate of return on investment. According to some experts, ROI meaning is money or assets that can be obtained or even lost due to an investment process in a business.

Some things that must be considered when investing are if the ROI is negative, then the investment must be reconsidered because the investment will suffer losses.

Conversely, if the ROI is positive, it will provide benefits for your business. ROI meaning is a form of profitability ratio to measure the company’s overall ability to invest in assets used for company operations to generate profits.

Read more: Revenue vs income 101, which one is more profitable?

In calculating ROI, it requires the time or duration needed to achieve a certain target and it is highly recommended for those of you who are going to start a business or initial business, because understanding ROI can measure the efficiency of capital use in production and sales companies.

Return on investment also has a very important value as one of the calculation methods commonly used in determining the decisions to be taken in your business.

Factors Affecting Return On Investment and ROI meaning

  • The rate of turnover of assets used for company operations
  • Profit Margin

The amount of operating profit expressed as a percentage and amount of net sales. Profit Margin measures the level of profit a company can achieve associated with its sales.

The advantages of ROI (Return on Investment)

  • ROI can be used for planning as well as the foundation for a company to make decisions such as buying assets, funding for certain programs and investing
  • ROI can be used as a measure of the profitability of each company’s product.
  • ROI is closely related to the efficiency of capital use, production efficiency and sales efficiency.
  • Become a comparison tool with competitors’ businesses. However, this can only be achieved if you have industry data so you can calculate industry ratios first.
  • Can be used to do business planning.

The disadvantages of uncontrolled ROI include:

  • Has difficulty comparing the rate of return of companies with other companies because of the different accounting systems between companies.
  • The use of ROI in the analysis cannot be used to compare two or more companies with satisfactory results.

There are several things that you should know in this formula, which relates to the costs that will be incurred in investing, the income from investing, as well as the time that must be spent until the costs are returned. The formulas that are usually used are:

ROI = (Income from Investments – Investment Costs) / Investment Costs x100%

Read more: 4 types of market that you need to know before starting a business 

Sample case:

You want to buy a printing machine for IDR 170 million. This machine can save the use of labor for up to 7 people and the salary for each worker is IDR 2.5 million per person. What is the ROI for a year?

Total investment income = 7 x 2,500,000 x 12 = IDR 210,000,000

Investment cost = IDR 170,000,000

ROI = (210,000,000 – 170,000,000) / 170,000,000 X 100 = 23.5%

Based on the above calculations, you only get 23.5% of the initial capital you spent on this investment, meaning that you suffer losses because you only get an ROI of 0.235 times your initial capital.

Often we as business actors are only profit-oriented for a product and service. It would be better if we should also calculate ROI accurately to get certainty and confidence that the business being run is capable of growing.

In running a business, an entrepreneur must also pay attention to the amount of funds that must be invested in achieving sales targets, the amount of profit to be obtained, and part of the profits will be used to develop the business.

If the investment made only generates relatively small returns, then the business will have difficulty developing in the future and there is the possibility of failure.

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