Smart in 60 seconds! Today: the Return on Investment
A new episode of our series in "The Agency Blogger". Here we regularly explain the most important terms of agency controlling in a short and sweet, but practical manner. Today: the Return on Investment.
The return on investment, or in short: ROI, is one of the most frequently used economic indicators. It is the benchmark for the profitability of a company and can be used for the company planning and also as a basis for investment decisions. The ROI is ideal for analysing both individual business areas or even projects as well as the entire company.
The ROI for companies is generally calculated as a proportional ratio between profit and invested capital.
The formula for this is:
ROI = Profit / Invested capital * 100%
A fictitious example for the communication sector: An agency creates an advertising campaign for a company with a total budget of one million Euro. The agency receives a payment of 100,000 Euro for media, creation and other services. After subtraction of their costs, the agency has a profit of 15,000 Euro from this project. Thus, the ROI is at 15 percent.
The target value of the ROI should ideally be greater than 10 percent in order to form reserves and therefore guarantee the ability to invest in the future.
Agency software provides detailed controlling and an accurate analysis of the ROI, because all relevant numbers are at hand. It makes sense to consider the ROI over a longer period of time in order to be able to analyse the development and to gain benchmarks through this.