In a recent episode of The Shades of Entrepreneurship, I had the pleasure of welcoming Scott Ericson, co-founder of Wheelhouse 20/20, to dive deep into a vital topic for all business owners: Return on Investment (ROI).
Wheelhouse 20/20 specializes in developing and executing strategic B2B and B2C marketing plans for all segments of the building supply channel.
Whether you’re an experienced entrepreneur or just starting out, understanding ROI is crucial for making informed financial decisions that can lead to sustainable growth.
The Crucial Business Metric: Return on Investment (ROI)
What is ROI and Why Should Entrepreneurs Care?
ROI is a key performance indicator (KPI) that businesses use to assess the profitability of their investments.
It’s a simple yet powerful formula:
(Net Profit ÷ Cost of Investment) × 100 = ROI (%)
This percentage gives you insight into how well an investment is performing. Whether you’re launching a new marketing campaign, purchasing equipment, or expanding your team, ROI helps you gauge if the financial benefits outweigh the costs.
By comparing different options, entrepreneurs can make strategic choices that maximize returns and drive business success.
ROI Beyond Just Numbers
While calculating ROI for financial investments is straightforward, some factors aren’t as easy to quantify but are just as critical. Time management, optimizing floor space, upgrading product quality, or expanding delivery capacity all play a major role in the long-term success of your business.
However, measuring their ROI can be challenging because they don’t always yield immediate or direct financial results.
Additionally, ROI isn’t always about cash returns. Investments can pay off in other ways, such as increased market share, enhanced brand awareness, or improved competitiveness. For example, a business that is first to market with an innovative product can gain a “first-mover advantage,” which might not immediately translate into revenue but can solidify its market position over time.
A Practical Example of ROI
Let’s break it down with a common example: stock investments.
Suppose you purchase 100 shares of a company’s stock at $20 per share, for a total investment of $2,000. After a while, the stock price rises to $30 per share, and you decide to sell your shares for $3,000.
Your profit is $1,000, but to determine your ROI, you need to divide that profit by your original investment. So, $1,000 (net profit) ÷ $2,000 (cost of investment) = 0.5 (return-on-investment), or 50%.
This 50% ROI shows that your investment was profitable and gives you a clearer understanding of how well your money worked for you. Whether you’re considering investing in stocks, new equipment, or marketing strategies, knowing your ROI helps you make smarter, data-driven decisions.
The ROI Mindset
Understanding and calculating ROI allows entrepreneurs to approach their business with a strategic mindset. Rather than relying on gut feelings or vague projections, ROI provides concrete data that can guide decision-making.
However, it's also essential to adopt a holistic view when calculating returns. Some investments—like improving company culture, enhancing customer relationships, or investing in employee development—may not yield immediate financial results but can significantly impact long-term success.
At the end of the day, ROI is about making sure your resources—whether time, money, or energy—are being used efficiently and effectively. The better you understand your ROI, the better equipped you are to steer your business in the right direction.
Final Thoughts: ROI in Action
In the episode with Scott Ericson, we emphasized that ROI is more than just a formula—it’s a mindset that every entrepreneur should adopt.
The ability to assess which investments are driving the most value helps businesses grow smarter and faster.
And remember, you don’t have to be a math genius to calculate ROI—just keep the formula handy and apply it to your next business decision. So, the next time you’re evaluating an investment or business decision, ask yourself: What’s the ROI?
(Net Profit ÷ Cost of Investment) × 100 = ROI (%)
Understanding this simple equation could be the difference between a thriving business and one that struggles to grow. Stay tuned for more insights like these on The Shades of Entrepreneurship podcast!
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