Return On Investment
The most important and crucial indicator of a business is to gauge the returns that you get from it. It is the only know what direction you are headed to in business. Return on investment, therefore, refers to a formula that is used to determine the business progress. ROI is ratio expressed as a percentage of the profit you get from the business and the total cost of investment. Since it can be expressed as a percentage, ROI is an excellent tool for comparing enterprises. Many people will confuse ROI with the profit of the business. It is good to note that ROI deals with the business returns and the total cost of investment of the business. ROI is very easy to calculate and this makes it very useful in gauging the profitability of an enterprise. It is also very easy and simple to understand and break down. A wide variety of investments type can use ROI to assess a business.
Limitations or ROI
Like any other methods of determining the life worth of any investment, ROI has got its challenges too. The first challenge is that it may be difficult to calculate and compare the ROI of two investments that are the same in age. One will need to find the ratio of the age of the two investments so as to divide the earnings and be able to compare the two investments accordingly. The other limitation is that ROI can be manipulated in different ways to give different outcomes depending on need. For example when calculating the ROI of a real estate, one may use the initial cost of the total cost of the investment. Another parson may include other accrued costs like renovation cost, agents cost and taxes to the initial cost and use the final figure as the cost of the investment. Both these methods are correct but give different results. This one of the greatest advantage of ROI but is still its most significant limitation bearing in mind that it gives an impression that is not accurate.
Development on ROI
The first model of ROI was created in the early 00s. Since then, ROI has undergone a lot of changes to make it more suitable for comparing investments and gauging businesses. The recent development was one made by the business investors in the world to get the social return on investment a new feature that takes into account the social impacts of any investment or project. This makes it easy to make decisions to make decisions on capital and resources allocation.