Key takeaways
- ROI is a financial metric used to understand the profitability of a project.
- The formula for calculating ROI is (Net Profit / Investment Cost) × 100.
- Project management software keeps tabs on your budget, encourages the fair use of resources, and improves project efficiency.
Projects, big or small, require the right resources and a whole lot of hard work. Funds aren't limitless, so it's imperative to understand if your project is worth the investment before getting started. Calculating the ROI can help you determine whether your project is on track to deliver positive financial returns, or if it's going to fall short of expectations. This guide provides a thorough, step-by-step process to calculate ROI through easy-to-understand examples.
What is ROI?
ROI is a financial metric that gauges the profitability of a project by comparing its net gain to its initial cost. The higher the ROI, the higher the project return. A low ROI is an indication of limited profitability. ROI calculation aids in optimizing resources, measuring past project investments, and influencing decisions that can pivot businesses towards significant growth.
Formula to calculate the ROI of a project
You can arrive at the ROI of your project by dividing your net profit by the total investment project.
ROI= Net Profit / Total Investment × 100
Steps to calculate ROI for a project
Identify total investment costs
Take all your project expenses into account. Use the following list for reference:
- Employee salaries
- Cost of equipment and software
- Operational expenses
- Marketing and advertising costs
- Additional overhead costs
Example:
A marketing company is developing a new website. Take a look at the investment breakdown:
- Developer salaries: $50,000
- Hosting and software: $5,000
- Marketing and ads: $10,000
- Additional costs: $5,000
Total investment cost: $70,000
Calculate the Net Profit (Total Gains - Total Costs)
Next, calculate the net profit, which can be calculated by subtracting the investment costs from the total financial gain of the project. Include gains like:
- Generated revenue
- Cost savings
- Enhanced efficiency
Example:
Once the website is launched, the company makes $150,000 in sales in the first year, and the operational costs of the website maintenance are $30,000.
Net Profit = Total Revenue - (Investment Cost + Maintenance Costs) = $150,000 - ($70,000 + $30,000) = $50,000
Apply the ROI formula
The standard ROI formula is: ROI = Net Profit / Total Investment × 100
Example:
A 71.4% ROI translates to the company gaining 71.4% of its investment as profit.
Consider intangible benefits
Make a list of project benefits that are not financial.
- Brand awareness: Better reputation and visibility
- Customer satisfaction: Higher retention and engagement rates
- Operational efficiency: Reduced mistakes and time saved
Compare ROI against industry benchmarks
Compare your ROI with industry-approved benchmarks to assess performance. An ROI that is lower than competitors can mean budget inconsistencies and poor execution.
Optimize future project planning
After you've calculated the ROI, you should:
- Evaluate cost overruns and budget adjustments.
- Look into areas for improvements.
- Plan for future projects based on data-focused insights.
How Zoho Projects can help improve ROI
- Cost tracking: Track real-time expenses and prevent budget overruns by using our budget module. You can also integrate with Zoho Books or Zoho Invoice.
- Task automation: Save time by automating repetitive tasks and reducing manual work. Place your focus on devising cost-effective strategies to obtain a high ROI.
- Resource optimization: Allocate tasks to team members efficiently, increase productivity, and save money.
- Data-driven insights: Zia Insights gives you intelligent, real-time insights that help you gain visibility into profitability, so you can set your project on the path of high ROI.
A powerful, intuitive tool, Zoho Projects helps manage project costs, monitor progress, and allocate resources judiciously. It also helps improve ROI!
ROI calculation is required for assessing the financial success of a project. When you understand costs, calculate profits, and take additional benefits into account, you can make informed investment decisions and drive steady business growth. Use Zoho Projects to ensure your spending leads to the best results.
Zoho Projects is a powerful project management software that stands out through its extensive ecosystem, adapting to various business requirements. With its user-friendly interface, easy-to-implement features, and numerous customizations, Zoho Projects is an invaluable asset for half a million SMBs and enterprises worldwide, helping them scale up and achieve enhanced efficiency.