How to Calculate the ROI in a Start Up Venture

by C. Taylor

Calculating your start-up venture's return on investment (ROI) assesses the profitability of the business by analyzing returns versus investments. One investment often overlooked is your time, which is hard to monetize, but essential for comparing alternatives. For example, if you exclude your time when calculating ROI on a $100,000 investment, you might discover an impressive annual ROI of 40 percent. But then you have to consider the alternative; that 40 percent equates to $40,000 in net profit, but if you could work a regular job and get $50,000 annually and invest that $100,000 elsewhere. In this case you'd earn more money, and endure less stress.

1. Add all expenses associated with the start-up business. This should include mortgages, utilities, licenses, insurance and salaries. Include a reasonable salary for yourself in this total, if you are actively participating in the business, rather than only being an investor. If you have trouble estimating a salary, use the pay you'd expect for working a regular job suited to your qualifications, or your current pay if you're anticipating quitting to start your business. For example, after including a $50,000 salary for yourself, assume the total annual costs are $150,000.

2. Tabulate the expected gross profits of the business. This will be total of all incoming sales or sources of revenue. In the example, assume you anticipate regular annual sales of $140,000.

3. Subtract the total costs from the gross profits. Continuing the example from the previous step, this gives you -$10,000.

4. Divide this number by the total costs. In the example, this gives you a ROI of -0.06667, or -6.667 percent. When factoring in your time, this means you're losing money on the investment, versus working a regular job. However, if the gross profits were greater than the annual costs, you'd have a positive ROI, such as 33.33 percent on gross profits of $200,000.