ROI Meaning: Things A Businessman Need to Know About

You have to understand ROI meaning. Especially if you are currently in a job in the business division, and also if you are a businessman. This term is increasingly being used today. Even if you don't work in the business sector, this term will still appear.

ROI itself appears when you invest. Today, investing is no longer something that only the rich do. Currently, investments can be made by employees. Read this article to find out what ROI means and other things about ROI.

 

About ROI

For those who don't know what ROI meaning, ROI is the ratio between profits compared to the investment of money that has been given. In common language, ROI meaning knowing how much profit can be obtained from money that has previously been invested in the business. ROI itself is an acronym for Return on Investment.

ROI is very important for an investor. Investors do not invest their finances to incur losses. In his mind, he even has his investment projections. Therefore, a business must explain and offer the ROI that these investors can get.

A business needs investment to grow. However, it is not that easy to get an investment. You have to know your business very well, then know where you want to take the business. In addition, the business also knows the business projections for the next few years.

An investor wants to know roughly, the return on investment that he will get from investing in the company. That way, he could see hypothetically how much money he could invest. At the very least, he wants the profit earned to be equal to the money he invested.

Also from ROI, a company can find out the funds needed to invest in the company. The calculated ROI percentage can be used as a temptation for investors so that they want to invest. ROI can also be used to calculate the company's actual finances that may occur in the future to divide the annual profit by the investment made.

The seller must know the capital he needs to develop the business, and what budget allocation he wants. By knowing these things, only then can he offer investors what they get by investing. One variable that can be explained is ROI.

 

ROI Benefits

ROI needs to be calculated not only for the good of investors but also for the business. The following is the meaning of ROI to investors and companies:

1. Efficiency Measurement
   Knowing ROI means you can measure efficiency in a company. Efficiency in question is the efficiency of the use of capital, production, and sales. This of course can happen if the company has implemented a good accounting system. That way, you can find out whether the use of funds is efficient or not.
2. Knowing Competitor Weaknesses
   Competitors are one of the best comparison benchmarks. With the ROI that has been measured, you can find out the weaknesses of your competitors when you have an ROI that is not much different from your business. Comparing with similar companies will allow you to see the advantages and disadvantages that exist in your business.
3. Measuring Company Profitability
   With a good product cost system, the capital and costs that have been calculated can be allocated to the products that have been produced by the company concerned. This will make it easier for companies to calculate the profitability of each product produced by the company.
4. Basis for Decision Making
   ROI can also be used as a basis for decision-making, especially during expansion. When thinking about a business expansion, a company must have taken into account the existing ROI. When that happens, you can use ROI to help you make decisions regarding the expansion.
5. As a Control Tool
   In addition, ROI can also be used as a control tool by companies. Every company certainly has the desired prospects in the future. To get this, a business needs ROI as a control tool so that the desired prospects can be achieved.

 

Factors Affecting ROI

Two factors affect the Return on Investment or ROI, namely:

1. Turnovers
   Turnover is the rate of asset turnover that occurs in a business. When the speed of turnover of assets or assets is getting faster, it means that the investment will also return quickly. If in a period the rate of asset turnover is faster, the rate of return on assets is also getting better.
2. Profit Margins
   Profit Margin is also known as the company's profit ratio. The profit gained in ROI will be higher the greater the calculation of the company's profit ratio obtained by the business.

 

ROI Formula

If you are new to Return on Investment or ROI, there is a formula you can use to calculate ROI. The formula in question is as follows:

ROI: (Total Revenue - Initial Capital) / Initial Capital x 100%

Sample case:

Investors invest money into your business of Rp. 10,000,000. In the period in question, your business can generate Rp. 15,000,000. This means the profit earned is Rp. 50,000,000. After that, you can use the formula above so that it becomes:

ROI: (15,000,000–10,000,000) / 10,000,000 x 100%

ROI: 5,000,000/10,000,000 x 100%

ROI: 0.2 x 100%

ROI: 20%

 

In conclusion, from this investment, the ROI that investors get is 20%

Those are brief explanations of ROI meaning. Apart from knowing the ROI meaning, you can also find out the factors that affect ROI and the formula to calculate them. In addition, knowing the benefits that a business and investors get from ROI. ROI also have two factors that can affect them. 

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