How to Calculate ROI Before You Spend or Borrow

The basic ROI formula

ROI equals net gain divided by total cost, shown as a percentage. Net gain is the extra profit the investment produces minus what it cost.

The formula is: ROI = (gain from investment minus cost of investment) divided by cost of investment.

Illustrative example: you spend $10,000 on a machine that produces $16,000 of extra profit over its useful period. Net gain is $6,000. ROI is $6,000 divided by $10,000, or 60 percent.

The hard part is not the arithmetic. It is estimating the gain honestly. Use conservative numbers and base them on what you already know, such as current orders you turn away or current time lost.

Add financing cost to the cost side

If you borrow, the total cost is the purchase price plus all interest and fees. Compare gain against that total, not the sticker price alone.

Say the same $10,000 machine is financed with total repayment of $11,500. The cost is now $11,500 for the purpose of ROI. If the gain is still $16,000, net gain is $4,500 and ROI is about 39 percent.

That is still attractive. But if the gain is only $12,000, net gain is $500 and the project barely clears its cost. Seeing this before you sign is the point. ROI Funder shows true cost, payback period and monthly-equivalent payment up front so you can run this check.

Payback period: how long until it earns back

Payback period is the time it takes for the extra profit to equal the amount invested. Shorter payback means less risk and less strain on cash.

Divide total cost by monthly extra profit. A $11,500 total cost with $1,500 of extra monthly profit pays back in about 7.7 months.

Two projects with the same ROI can have very different payback. A 60 percent return over six years is not the same as 60 percent over one year. Cash-constrained businesses should lean toward faster payback. The equipment payback period guide walks through this for machinery.

Compare payment size to the extra profit

A project can have a strong ROI and still be unaffordable if the monthly payment is larger than the monthly gain in the early months.

Build a simple month-by-month table. Include the payment, the extra profit and the difference. If a payment of $1,000 starts in month one but the extra profit ramps up over four months, you need cash to cover the early shortfall.

The shortfall in the first two months is $1,000. Plan for it. See how much of revenue can go to loan payments for a rule of thumb.

Common ROI mistakes

The usual errors are counting revenue instead of profit, ignoring your own time, forgetting fees, and assuming best-case results.

• Revenue is not gain. Subtract the cost of goods, labor and extra expenses the project creates.
• Ignoring ramp-up. New hires, equipment and ads rarely produce full results on day one.
• Leaving out maintenance and insurance. They reduce the gain.
• Single scenario. Run a low case and a base case. If the low case still works, proceed with more confidence.
• Not tracking afterward. Record actual results so your next estimate improves.

Using ROI to decide on funding

Borrow when the expected gain clearly exceeds the total cost under a conservative case, and the payments fit your cash flow during ramp-up.

If the numbers hold, the right product depends on the purpose. Equipment suits equipment financing. Inventory or short-term needs may suit working capital. Our guide to which funding fits compares the options.

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Applying takes a few minutes with a soft credit pull, and you can decline any offer.