Business Calculators
ROI and Payback Calculator
Work out the return on an investment as an annual rate rather than a headline percentage, with running costs included and the month it pays for itself.
Overview
Why use a free ROI and payback calculator?
This free ROI calculator works out what a purchase or a project returns, and how long it takes to pay for itself. Enter what it costs, what it brings back, what it costs to run and how long it runs for, and it reports the return as an annual rate alongside the total.
The annual rate is the number to argue from. Return on investment is normally quoted as a single percentage (gain divided by cost), and that figure has no clock in it. Doubling your money is an excellent result over two years and a poor one over ten, and the plain percentage is identical in both cases, which is how it comes to be quoted so often and acted on so badly.
Running costs are part of the model rather than an afterthought. Equipment needs maintaining, software renews, a vehicle needs insuring, and a calculator that takes only a purchase price and a benefit will overstate every result it produces. The error is small in the first year and compounds from there.
Everything is calculated in your browser as you type. Nothing is uploaded, stored or logged, so there is no reason to round the numbers before entering them. There is no signup and no limit on how many projects you run through it.
Step by step
How to work out return on investment and payback
Enter what it costs
Everything paid out at the start: the price, plus delivery, installation and setup if they apply.
Say how the money comes back
Either a return in every period, which is the usual shape for equipment or a hire, or a single amount at the end for something you expect to sell on.
Add the running costs
Maintenance, licences, insurance and support. Leaving them out is the commonest reason a projection turns out optimistic.
Set the term
How long the returns realistically continue, in months or years. Every figure is reported against this, because a return without a term cannot be compared with anything.
What you get
- Annual rate, not just a headline percentage
- Payback period in years and months
- Running costs counted against the return
- Returns each period or one amount at the end
- Period-by-period schedule of where the money is
Background
Total return, annual return, and payback
Three different questions hide inside the phrase 'return on investment', and mixing them up is what produces confident bad decisions. The first is how much you made in total: the gain divided by what you put in, which is the familiar percentage. The second is how fast you made it: the rate per year, which is the only version comparable to a savings rate, a loan rate or another project. The third is when your money came back, which is a cash question and has no percentage in it at all.
The gap between the first two is larger than most people expect, because it compounds. A 100% total return over ten years is 7.18% a year. Over five years the same 100% is 14.87% a year, and over two years it is 41.42%. All three are 'we doubled our money', and they describe completely different investments. Whenever a return is quoted without a term attached, this is the information that has gone missing.
The annual rate here is found by solving rather than dividing. Dividing the total return by the number of years ignores compounding, and it is furthest out in the simplest case: a single sum returned on the last day. Doubling your money over ten years is 10% a year by division, and 7.18% in fact, because each year's growth builds on the year before. Timing is the second thing division cannot see. If money comes back gradually, each instalment can be spent, banked or reinvested for the rest of the term, and an average has nowhere to put that. What is reported instead is the rate at which the money going out and the money coming back exactly balance, given when each of them happens: the same idea a lender uses to quote an interest rate, applied to your project.
Payback answers something the rate cannot. A project can carry a strong annual return and still be impossible, because the business cannot be without the cash for that long. Small businesses fail with full order books and profitable contracts for exactly this reason, so the month the money comes back is worth knowing before the purchase rather than after it.
None of it is a forecast. The arithmetic is exact and the inputs are estimates, and the output cannot be more reliable than the guess about what the thing will actually return. That is an argument for entering a cautious figure and a realistic term, not for skipping the sum: a projection you can see the workings of is much easier to challenge than one carried in somebody's head.
Not to be confused with
- ROI and profit margin
- Margin measures a single sale: what proportion of the price is left after costs. ROI measures a decision: what a sum of money produced over a period. A business can have healthy margins on everything it sells and a poor return on the machine it bought to make it.
- ROI and payback period
- One measures size, the other measures speed of recovery. They routinely disagree, and both matter. A project returning 60% over six years pays back far more slowly than one returning 25% over eighteen months, and only one of them suits a business that needs its cash back.
- Total return and annual return
- The same profit expressed with and without a clock. Total return is what people quote; the annual rate is what can be compared to anything else. Any time these two are far apart, the term is doing the work and deserves to be stated alongside the figure.
- Return on investment and return on ad spend
- ROAS divides revenue by advertising cost and ignores the cost of delivering what was sold, so it is always the flattering number. To use this calculator for a campaign, enter the additional gross profit rather than the revenue, or the result will be wrong by the whole cost of goods.
- Cash returned and profit earned
- Payback counts money actually received. An invoice raised is profit but not cash, and a customer on ninety-day terms delays payback by ninety days without changing the return at all. If your returns are invoiced rather than banked, enter them when you expect to be paid.
Reference
What to check before you rely on the number
The arithmetic is exact; the inputs are estimates. Nearly every ROI projection that turns out wrong was wrong on the way in, and usually in one of these places.
The full cost, not the price
Delivery, installation, training, the time somebody spends setting it up, and whatever it disrupts while it is being installed. The invoice is the visible part of the cost and frequently not the largest one, especially for anything that changes how people work.
Required
A return you can defend
This is the number that decides the answer, and it is the easiest to inflate. If the case rests on a saving, be specific about what stops being paid for; if it rests on extra sales, be specific about who buys them. A figure you would be uncomfortable defending is one to lower.
Required
The term, chosen honestly
How long the return really continues: the useful life of the equipment, the length of the contract, how long the advantage lasts before competitors have it too. Extending the term is the easiest way to make any project look good, and the least honest.
Required
Running costs across the whole term
Maintenance, licences, insurance, consumables, support contracts. These grow with the term, so they matter most in exactly the long-horizon cases where a projection is already at its weakest.
Required
Whether the return is cash or profit
Payback counts money in the bank. If the return arrives as invoices paid on terms, it arrives later than the model assumes, and the payback figure will be optimistic by however long your customers take to pay.
Optional
What the money would otherwise do
An annual rate is only meaningful next to an alternative. Compare it with what the money earns where it is, and with what you pay to borrow: a project returning less than your overdraft costs is losing money in a way the percentage does not show.
Optional
Tax treatment
Capital allowances, depreciation and the deductibility of running costs vary by jurisdiction and by how an asset is classified, and they can change the answer materially. The figures here are before tax, so check the treatment of anything substantial with your accountant.
Optional
The value left at the end
A vehicle or a machine is usually worth something when you are finished with it. If you expect to sell it, that resale value is part of the return, and leaving it out understates a project that a competing option might beat only on paper.
Optional
What happens if the return is half of what you assumed
Run it again with a pessimistic figure before committing. A project that still works at half the expected return is a genuinely safe decision; one that only works at the optimistic figure is a bet, which is fine as long as everybody knows that is what it is.
Optional
Who it helps
Who needs to calculate return on investment?
Small businesses buying equipment
A machine, a vehicle, a van fit-out or a new till system. The question is never really 'is the return positive' but 'is it better than the alternatives, and can we be without the cash that long', which needs the annual rate and the payback period together.
Freelancers and sole traders
A better laptop, a camera, a course, a subscription that saves an hour a week. The sums are smaller and the logic is identical, and an hour a week saved is a real return that is easy to put a number on once you know your own rate.
Agencies and consultants
Client-facing business cases live or die on whether the numbers survive scrutiny. A projection stating its term, its running costs and its payback period is much harder to argue with than a single percentage on a slide.
Anyone weighing a hire
The cost is the fully loaded one (salary plus employer costs), and the return is the additional billing or capacity. Payback matters more here than almost anywhere, because a new hire produces very little in the first months and the cash goes out from day one.
Bookkeepers and accountants
Clients ask whether a purchase is worth it, and normally after they have decided. A quick, transparent projection makes the conversation about the assumptions rather than about the conclusion, which is where it is actually useful.
Anyone comparing two options
The cheaper option with a shorter life and the expensive one that lasts a decade are hard to compare directly and easy to compare as annual rates over their own honest terms. That is the comparison the plain ROI percentage cannot make.
Do it properly
Best practices
Quote the rate and the term together
A return without a period attached cannot be checked or compared, and it is the form in which optimistic figures travel furthest. 'Twelve per cent a year over four years' invites the right questions; '50% return' does not.
Be pessimistic about the return, realistic about the term
The two most common ways a projection flatters itself are an optimistic benefit and a term stretched until the numbers work. Cut the benefit rather than extending the term: a shorter term with a smaller return is the version that survives contact with reality.
Include everything you will still be paying in year three
Maintenance, licences, insurance and support are the costs that make a purchase look worse and a projection look honest. Their effect grows with the term, so they matter most in exactly the cases where the term is doing the persuading.
Check the payback period against your cash position
A strong return that ties money up for three years is unavailable to a business that needs it in eighteen months. Work out whether you can wait before deciding whether it is worth it: the order matters.
Compare against doing nothing
The alternative to a purchase is rarely a different purchase; it is keeping the money. An annual rate makes that comparison directly, against a deposit rate or against what you are paying to borrow, and some perfectly positive returns lose it.
Keep the projection and look at it afterwards
Compare what a purchase actually returned against what you assumed it would. This is the only thing that improves the next estimate, and it takes minutes. Most businesses never do it, which is why the same optimism recurs.
Avoid these
Common mistakes
Quoting a return without saying over what period
Always attach the term, and prefer the annual rate. The same total return can be excellent or poor depending only on how long it took, and a percentage with no clock in it cannot be compared with anything: including the option of leaving the money alone.
Dividing the total return by the number of years
Division ignores compounding and overstates the rate, including in the simplest case: doubling your money over ten years is 10% a year divided, and 7.18% compounded. It is also blind to when the money arrives, and an instalment returned in year two can be put to work for the remaining eight. Solve for the balancing rate instead, which is what this tool reports.
Leaving out running costs
Maintenance, licences, insurance and support are real and recurring, and their effect grows with the term. A projection without them is a sales figure rather than a business case, and it is optimistic by more the longer it runs.
Using revenue instead of profit as the return
Revenue includes the cost of delivering what was sold. Enter the additional gross profit, or a campaign that turned £10,000 of spend into £30,000 of sales at 20% margin will look like a triple return rather than the loss it actually was.
Stretching the term until the numbers work
If a purchase only pays back over eight years, the honest conclusions are that the return is thin or the term is wrong, not that it is an eight-year investment. Set the term from the useful life first, then see what the return comes out at.
Treating payback and return as the same question
They routinely disagree. Check both: the rate tells you whether it is worth doing, the payback period tells you whether you can afford to do it, and a business can be sunk by the second while being right about the first.
FAQ
Frequently asked questions
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