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ROI differences


I have come across two equations for giving ROI%.

(Benefits minus costs)divided by costs. Result x 100 = ROI%

(Benefits divided by costs) x 100 = ROI%. If, eg benefits = £100,000 and costs = £20,000. one gives 400%, the other 500%.
Anyone with the maths to explain and comment on correct on?
Leslie Rae

9 Responses

  1. ROI%

    I am sure that the accountancy answer is that there is no proper answer, and that no matter which method you use, you need to be consistent.

    However, the formula depends on what you want to find out.

    By deducting the Cost from the Benefit provides you with the percentage profit from investment (400% from your example).

    By dividing the Benefit by the Cost provides you with the return on investment. (500% from your example)


  2. Gross and net ROI
    Leslie, the confusion arises because the first example shows net benefit the second is gross benefit. Otherwise same calculation – same answer.

    Hope this helps

    Paul Kearns

  3. ROI differences
    Sorry Paul, this does not make sense. If in the first equation the benefit is gross, it becomes a simple nett benefit when the cost is deducted. This is already included in the second where the benefit must be nett otherwise it isn’t benefit. I can see the way you are thinking, but if I am right, why talk about gross benefit minus cost when all you need to put is benefit (ie = nett benefit)?
    Otherwise I think we need a qualified pure mathematician to give the reasoning. Anybody know one?

  4. Net – surely?
    Coincidentally, I’ve just received my ROInet Digest Number 393 (a very useful resource)in which Dr Greg Wang, the Listservant for the group, says:
    “By “no ambiguity”, I meant that there is no ambiguity in the math calculation using the ROI formula, i.e., ROI= (Net Benefit)/(Total

    Hope this may help.

    Jeffrey Brooks.

  5. ROI
    Leslie, in your example the 400% return is the amount net of your costs – ie clear profit. The 500% includes the costs. The actual return on the investment you have made is technically 400% – you keep the 20,000 and make a profit (return)of 400%.

    Whilst I am on . . . a personal ‘bee in my bonnet’. I encourage people not to talk about costs in the same sentence as training – I insist on using investment. Accountants will save costs and cut training budgets in difficult trading periods but will continue to make the kind of investments that produce great ROIs.

  6. Depends what you mean by…. !
    Investment is technically a capital sum that produces benefits.
    Benefits are of course the difference between ‘income’ less all the costs you incurred to achieve this (ie ‘profit’).
    But costs come in two guises: capital costs (lump sum, may be amortised) and revenue costs (which can’t be amortised and are incurred over the short term – call them running costs?).
    ROI is usually the return on the ‘capital cost’.
    ‘Return’ is Total Income less all *revenue*/operating costs.
    ‘Investment’ is the initial *capital* cost (plus interest etc if you want to be picky).
    So RoI is the former divided by the latter.
    With regard to training however, most people ignore the different types of cost – capital and revenue – but an accountant wouldn’t! Hence the reason why I think you have two formulae!
    For most managers, I think they are happy to know they paid £x revenue cost for a specific training intervention (ie just the ‘visible’ costs) and divide them into any quantifiable benefits. If the ratio is higher than 1, they will usually consider that they got a return on their investment. If it was less than 1, they made a loss.
    However, if they invested in a training building, for example, a ‘capital item’, they would then have to add the allocated portion of the capital cost of that building to the actual revenue costs spent on a specific workshop – all clear now?
    Best wishes
    Jeremy Thorn
    QED Consulting

  7. One calculation fits all
    Sorry you can’t see it Leslie. Let’s use your own figures. When you say £100K benefit you could mean sales training leads to £100K more profit from the extra sales generated as a result of the training. This is a gross figure until you deduct the cost of the training itself (£20K. Then you use the ROI formula (there is only one)which gives you a net ROI of 400%. Your 500% figure is a gross ROI figure because you haven’t deducted the training cost. No ambiguity, no different calculation, just need to define gross versus net.

  8. ROI – maths or mindset?
    I remember the answer by reference to the phrase itself: Return on Investment (return divided by investment).
    However, without getting drawn in the inevitable mathematical complexities, there is also the mindset with which one can approach this. My mindset has led me to this version:
    Net Return (ie the benfits minus the downsides) divided by the Total Investment (ie the financial plus the non-financial costs).
    Graham O’Connell


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