What is ROI in business and how to calculate ROI?

Apr 05, 2024

In B2B finance, the duties of a finance team are to manage accounts reporting and strategize spending.

Strategic expense management means ensuring that a company receives maximum business ROI (Return On Investment), no matter how small the expense is. They do everything to make sure that every expense brings out the best benefits and profits for the company.

ROI Finance is a term expressed in percentage evaluated from returns of an investment and total cost spent.

﻿For effective finance management, your company’s finance team should start measuring business ROI for every business cost.

ROI measurement is the way to determine whether your investment brings you positive or negative returns or if it’s a break-even.

A typical B2B finance team will always be careful in every expense it spends due to the limited funds' availability. Even if the funds are abundant, measuring business ROI will tell if their expenses bring revenue or loss.

That’s how a small business grows into a huge empire.

For example, a company buys stocks for \$1000. Suppose they decide to sell it after one month for \$1500. Their B2B ROI is positive now, and their investment has benefitted them.

Small businesses also rely on investors who can be curious about where their money goes and its growth prospects.

Measuring business ROI can help the finance team prioritize their expenses based on what will fetch maximum returns.

A foresight on how the investments will turn into and strategizing B2B payments based on that is a must to take your financial capabilities to new heights.

How to calculate ROI to improve your financial workflow?

Want to know how to calculate ROI? With a simple formula, the finance team can do ROI finance estimation.

But the team must be able to predict the gains and losses based on current business and financial factors.

Here is the formula for measuring business ROI.

ROI = Net Profit/Total investment costs

(Or)

ROI = (Gains - total investment costs)/Costs

Net profit is the total profit gained through an investment.

You can estimate net profit when you subtract the total revenue generated from the actual expense incurred. Total investment denotes the amount spent.

You should write ROI in percentage. So, multiply the above results with 100 to estimate B2B ROI in percentage.

Here is a typical business ROI measurement.

A B2B finance team decides to invest \$100 in a marketing campaign. They spend another \$100 on further prospect engagement activities. So, the total expense up to this point is \$200.

Through this, the revenue they made through the clients generated out of this campaign is \$1000.

Here is an example on how to calculate ROI.

ROI = (1000-200)/1000 = 800/1000 = 0.8

So, their return on investment is 80%, and the marketing campaign is a huge success.

How to determine cost and measure ROI?

A B2B business may handle many expenses and plan multiple new investments.

Does this mean they perform ROI measurement for every investment? Yes. They should, in order to maximize their profit margin and provide justification for investors.

Before we see how they are measuring business ROI for different scenarios, let’s see two types of ROI. Estimated ROI is when a finance team estimates business ROI before a project starts.

﻿Actual ROI is the final measurement of ROI once the project is over and gains are known.

1. Vendor selection

Vendor selection is a hectic process. Finance teams have the hardest time here as cost estimation, and ROI measurement can turn complicated due to hidden costs.

If multiple vendors are shortlisted, ROI finance estimations can play a huge role in selecting the right vendor.

Another complicated factor in measuring the business ROI of a vendor is that you cannot accurately predict end gains. It can be nearly impossible to estimate the tangible outcome a vendor can produce.

For instance, if you are selecting software, the monthly or the annual subscription fee is the total investment cost.

Now see if you can estimate the value it brings to your business or if it’s a direct impact on your business profit. Is this software replacing any employees or teams? How this automates your system, how this simplifies your employees’ tasks. How much does your finance team save by selecting this vendor?

Comprehend these costs together to subtract and later divide by the total investment costs to find out ROI finance scores.

2. Open a second business location

When you open a new location in the same or a different city, you run over and consider many facts. One important factor is ROI measurement.

B2B finance teams mainly speculate factors like office rentals, construction or remodeling costs, and new hire costs. Note that the finance teams only regard initial investment costs.

Here is the breakdown of costs a business might encounter while setting up a second office.

• Building lease costs or rent + insurance and other documentation costs = \$2500

• Local permit fees + other set up costs = \$1000

• Equipment or inventory costs + transportation = \$1000

• New hire and marketing costs = \$500

• So, the total investment cost is \$5000.

• The office branch has been set up now, and it’s up and running. Around the end of the year, they generate a net profit of \$10000.

• ROI Finance score = 10000/5000 = 2

• Their B2B ROI is 200% which clearly shows that the investment has gained high yields.

3. Hiring employees

Hiring is the most expensive but unavoidable business expense. Upon detecting a vacancy, the finance team estimates the ROI to justify if the expense is valid or not.

ROI finance score is mainly calculated, especially when key hiring happens, like a chief or executive hiring.

The expense for hiring an employee is the combination of the hiring plus advertising costs and salary (includes training, incentives, and benefits).

Here is how a B2B finance team does ROI measurement and approves or rejects the hiring decision.

• The total cost spent to hire a marketing manager along with his/her salary for a year is \$20000.

• You can measure the gain by assessing the success or revenue generated through the projects involved by the marketing manager.

• If the marketing campaigns headed by the manager have made a net profit of \$50000, the ROI is 250%.

4. Budget allocation to a team

Apart from the finance team, a B2B company will have many functioning sectors like customer success, marketing, sales, and tech.

Budget allocation and prioritization are a challenge for the finance team as every department has its needs and justifications.

Without foreseeing a promising B2B ROI, the finance team cannot allocate funds.

Measuring business ROI for each department is how they decide how much funds to distribute.

Let’s consider the sales team as an example.

• They require \$5000 as their yearly budget, which includes employee training, tools, and other costs.

• The turnaround produced by the sales team at the end of the year is \$20000. This amount is based on the projected goals of the sales team.

• The business ROI of the sales team is (20000-5000)/5000, which is 300%.

5. Hiring agencies or consultants

Hiring an agency to outsource a task is pretty significant as it can automate or reduce your workload.

Here is how a finance team analyzes if this expense is worth investing in or not.

If you hire an agency, you will pay them based on their monthly plans.

If it’s a consultant, you pay depending on the workload or hourly pay rates of them.

There are some varying and hidden costs involved in both cases.

This cost will be the total investment cost. Gains and final business ROI are estimated similarly to the vendor selection category.

Does your small business have a dedicated finance team? Considering the volume of payments and accounts, you might not have set up a team.

But here is why you need the expertise of a finance team.

Streamlined approval workflows

You will no longer question everyone to find out who approved an expense. Approval workflows are necessary to navigate through business expenses and pay only the right bills.

As your company grows, you will notice an increase in invoices and bills handled by the accounting team.

﻿Without a fully-functioning B2B finance team and approval workflows, you cannot manage reporting functions.

﻿

Employee satisfaction

If the finance team is not there, ROI measurement and budget allocation can be improper. Employees have concerns about their work and want to improve processes.

It takes a finance team to capture and fix these faults and smoothen the issues through budgets.

Apart from work, there are other concerns too that employees expect the company to address. Unsatisfied employees can resign from work anytime. Looking for a replacement, hiring, onboarding, and training a new employee is an expensive solution.

Having a finance team here can help you bridge this gap and clear employees’ concerns through timely budgets.

Regulatory Compliance

Regulatory compliance solutions are one of the complicated tasks that only a finance team can manage.

You will have to spend a lot if you fail to maintain compliance.

But a smart B2B finance team can quickly fix this by setting up automatic workflows for records maintenance.

Avoid errors and risks

Measuring business ROI can also reveal risks and losses associated with an investment. When there is no finance team in place, risk prediction is impossible.

When there is a scope for an investment, you will not have a reliable team to analyze returns.

While the accounting team maintains spreadsheets for expenses, it is the finance team that makes this error-free and remains accountable for every spending.

Save time

Finance management takes time to accomplish as multiple teams get involved. Imagine if you are still using paper files and manually processing bills.

A finance team should be in place to take care of this mammoth task. They bring order to this accounting function while saving time for everyone involved in the process.

You understand the importance of ROI finance now and are ready to measure it going forward.

Following a step-by-step process after ROI measurement can:

The goal isn’t just saving money or growing that. Write down detailed goals you want to achieve for each department.

Check where you stand now, what the roadblocks are to accomplishing the goals, and the requirements of each department to fulfill them.

The budget decides how much return you get and also the business ROI. Set budgets based on your goals and ROI estimation.

﻿For higher ROI, the budget must be lower. But you cannot avoid key expenses for this reason.

You know the goals, and you have estimated how much you plan to spend. It’s time to strategize the implementation.

﻿Analyze the whole process and check if there is a need for automation. Be ready to invest in the automation tools it requires, as this can significantly reduce the steps and assure accuracy.

4. Plan with your team members

Discuss your planning and key objectives with the concerned team members. Share with them their goals and sprints and motivate them to get close to or beat the projected ROI.

Communication is the key. It avoids sudden surprises or changes in the plan that can overwhelm your employees.

5. Monitor and improve regularly

Checking in-between can help you identify if everyone is on the right track and give the right push at the right time.

You can also start measuring business ROI based on current performance and provide feedback to your teams. Don’t hesitate to change plans if your old plans don’t seem to work.

Finally,

By measuring business ROI, you can have clear goals to pursue and a streamlined process that your employees look forward to.

There isn’t any shortcut to growth. But if something can push and speed up that process, it is ROI measurement and improvement.

Track how you perform financially and make smart budgeting decisions with Volopay. Don’t let your financial anxieties and concerns stop you from planning your business ROI.