ROI Analysis: How Healthy Is Your Bottom Line?

Here's how to conduct an ROI analysis for your small business.

For small business owners, conducting an ROI analysis can be eye-opening. Return on investment provides an objective assessment regarding whether specific line items of your budget are helping grow your business. Often, there's more to the story than just the numbers. However, without a sense of the underlying financial impact of investments, it's difficult to manage your money properly over time. Here are some different ways entrepreneurs can conduct an ROI analysis.

Return on Total Assets

One way to think about ROI is to look at your return on total assets. Return on total assets divides your company's net profits (or revenues minus operating expenses) by your company's total assets. It effectively tells you how well you manage your assets to turn a profit. The higher the ratio, the more profit each dollar in assets is turning for your business. If your net profit is $50,000 and your total assets are $200,000, your ROI would be 25 percent or about 25 cents on each dollar. Over time, the goal is to more effectively use your existing assets and resources to grow revenue and future income.

Measuring ROI on Marketing Efforts

Marketing is an important area to calculate return on investment. Small businesses often have limited marketing budgets, and tracking ROI is the best way to determine which marketing channels yield the most revenue. Today's marketers have insights into consumer data all the way down to the individual level that can be leveraged to pinpoint which strategies are leading to sales and which aren't. One approach is to divide the expenses by the number of customers generated. This provides insight into cost per customer. The less it costs to acquire a new customer, the more efficient a potential marketing channel is for growing your business over the long term. Assessing channels relative to each other can help you find your most cost-effective lead generators and cut out the ones that don't yield the same ROI.

ROI on Products and Services

Another strategy for evaluating your return on investment is looking at the ROI generated on products and services. For example, consider that your company has hired an appointment-setting agency to help get your sales teams in front of new prospects. If the firm is on retainer for $5,000 per month and generating $20,000 in new business in the same time frame, that's a good ROI. Divide the expense by the profits generated, and you'll have an ROI of approximately four dollars for each dollar invested. Not every product or service has such a clear tie to revenue, however. By looking at these numbers, it's possible to determine whether products and services help increase efficiency or drain resources. It's important to consider whether low-yielding products or services are smart long-term investments.

Looking Beyond Dollars

No discussion on ROI would be complete without acknowledging that it's important to evaluate the non-monetary angle, as well. For example, companies make corporate social responsibility investments and connect with the local community. These activities may raise awareness of your brand, lead to influencer partnerships and ultimately drive business. However, it can be difficult to quantify those specific actions. What is critical is that the majority of your investments have a clear, positive ROI and that your company is profitable and thriving.

Ultimately, a small business owner can learn a lot about the health of their business and which investments are fueling long-term growth by running an ROI analysis. Set aside the time to do so now and take a deep dive into your company's financial future.