returnoninvestment.auWhat spending brings back to a business

A guide published by Dotto

Return on investment: what a business’s own spending brings back

Behind every outlay are two figures: what it cost, and what it brings back. This guide weighs the spending a business does on itself, such as a machine, an energy upgrade or a project, using the formulas and worked examples that Australian government agencies publish.

General information, not tax, legal or financial advice. This guide is about a business’s spending on its own operations. It does not discuss investing money, and it does not name or rate any product, supplier or adviser.

A steelyard, drawn for this guide. The cost hangs on the short arm, close to the pivot; the return is the weight slid along the long arm until the beam rests level. Each guide below is one notch on the arm.

Six notches on the arm

Each guide takes one way of weighing spending against what it brings back, starting with the plainest ratio and ending with the rules on claims a seller makes about savings. Sources are listed at the foot of each page.

  1. Notch 1

    What return on investment measures

    The ratio, what goes on each side of it, and what one percentage cannot show.

  2. Notch 2

    The break-even point

    Where sales cover costs, worked from Business Queensland’s own bakery figures.

  3. Notch 3

    The real cost of an asset

    What the ATO counts in an asset’s cost, and when that cost is claimed.

  4. Notch 4

    Payback on an energy upgrade

    How many years an upgrade takes to repay itself, and which cost belongs in the sum.

  5. Notch 5

    Costs and benefits, the government’s way

    The Office of Impact Analysis method: nine steps, and discounting to today’s dollars.

  6. Notch 6

    Claims about savings and returns

    What the ACCC says about a seller’s figures, and when a business buyer has consumer guarantees.

The plainest weighing

Business Queensland’s formula for return on investment divides the net profit from an investment by what the investment cost, then multiplies by 100 to give a percentage. The glossary on business.gov.au describes the same figure as a measure of how efficiently a business turns its owners’ and shareholders’ money into profit.

An illustration in round numbers, not real prices
Cost of the spending
$100
Net profit it brings in
$25
Return on investment
25%

$25 ÷ $100 × 100 = 25%, using Business Queensland’s formula.

The reading is only as good as the two numbers that go in. Net profit, in Business Queensland’s terms, is what remains once every operating expense has come out of gross profit, including wages, rent, utilities, advertising, taxes, interest and one-off costs. On the other side, the ATO counts more in an asset’s cost than its price: delivery, installation and improvements go in too. The real cost of an asset sets out each part.

What a single percentage leaves out

As this guide reads it, an ROI figure carries no clock and no picture of what would have happened anyway. Government guidance on weighing costs and benefits deals with both, and Business Queensland adds two more cautions.

  • When the money arrives The Office of Impact Analysis explains that people prefer a dollar now to a dollar later, so costs and benefits that fall in later years are discounted before they are compared. The method is in costs and benefits, the government’s way.
  • The world without the spending The same guidance warns against comparing before with after. The fair comparison is the world with the change against the world without it.
  • Cash as well as profit Business Queensland points out that profit is not the same as the cash a business has in the bank.
  • Whether it covers the risk Once the break-even point is known, Business Queensland suggests deciding what return is reasonable for the level of risk. See the break-even point.

Where the figures come from

Each page draws on the public bodies below and lists the exact pages it used at its foot. Where an example is this guide’s own, the page says so and uses round numbers rather than real prices.

An old iron beam scale against a pale wall. A brass weight sits on its graduated arm, a hanger with a round plate hangs from one end, and the frame stands on a low iron platform.
An old beam scale whose weight slides along a marked arm, the idea the steelyard drawing above is built on. Photo by tatlin on Pixabay
The bodies this guide reads, and what it takes from each
BodyWhat this guide takes from it
business.gov.auDefinitions of return on investment and the break-even point; owning or leasing equipment; ways to pay for energy upgrades
Business QueenslandFormulas for return on investment, break-even and minimum sales, with its worked bakery figures
Australian Taxation OfficeWhat counts in an asset’s cost, depreciation, and the instant asset write-off
energy.gov.au and the NSW GovernmentPayback periods for energy upgrades, and what an energy audit covers
Office of Impact AnalysisHow the Australian Government weighs costs and benefits, and discounts later years
ACCCThe rules on claims about value and performance, and consumer guarantees when a business buys

Business Queensland describes its break-even formula as a simplified one and suggests talking to an accountant, bookkeeper or tax agent when planning. The same holds for every sum here: they show how the weighing works, and a business’s own figures belong with its own adviser.

Sources for this page