Saturday, February 2, 2013
To safeguard your finances, support your life, and fulfill your needs, you may want to consider investing in a business. This is a serious decision that should be contemplated very carefully. There are five very essential points you ought to keep in mind before you embark on any investment plan.
The first step towards investing in a business venture is to get the money required for investing. You should evaluate the amount of capital you are able to raise to invest in the business of your choice. Some sources of capital that you might want to consider include:
This is a popular way for small business owners. It gives you freedom to run the business as you wish, without being dictated to by other investors and creditors.
Banks offer short-term, mid-term, and long-term loans to business owners and investors to help start up and run their businesses.
With hire purchase, you can start deriving benefits from business machinery and tools before completely owning them. You make payments in easy, pre-agreed installments.
Taking out a mortgage can help finance your business venture.
Selling part of your equity to a well-respected industry leader not only raises financing, but it also offers business connections, respectability, and credibility.
Leasing property can be used to raise start-up capital.
Friends and Family
Friends and family can show their love and support for your viable business ideas. Most of their investments and loans are offered on easy terms and lets you retain decision-making powers.
2. Return on Investment
One of the main aims of entering into business by investing your money is to make profits. Return on Investment (ROI) is one way of comparing your profits vis-à-vis the capital you invested to ascertain the viability of a business. You should measure the ROI before deciding on whether to make the investment. ROI is not easy to calculate, but a typical, simple calculation is:
ROI (%) = [(Gain from investment – Cost of investment) / Cost of investment] x 100
A rule of thumb to decide what makes a good ROI is to compare it with key stock indices and private equity investment expectations. If the ROI matches or exceeds these two, then it is a good investment. If the figure is less, then that is not a viable business.
3. Investment Goals
You should set clear investment goals before putting your money in any business. Investment goals provide a roadmap showing your business investment journey from where you currently are to your intended destination. You should put down your investment goals in writing for better clarity and motivation. You most likely will have multiple investment goals. Therefore, match each goal with a time-frame. Some examples of investment goals would be financing a wedding (short-term), renovating your home (mid-term), and paying for your kids’ college (long-term).
4. Risk of Investment
This is the probability of you losing your investment, either partly or in full. The top reasons for losing business investments are usually lack of knowledge and education on matters concerning your business and industry, and lack of business goals. To minimize your risks, these are some of the steps you should take:
1. Identify your risk categories
2. Ensure proper cash-flow management
3. Take insurance covers against identified risk categories
4. Hire qualified personnel and seek expert, professional advice
5. Due diligence
A very important aspect that should never be overlooked when investing in a business is checking on the integrity of the business. You should conduct due diligence before committing your finances in any investment opportunities. This involves:
1. Checking that the business is legal, and that all legal and licensing requirements have been met.
2. Know your team. Find out their performance histories and do background checks on any previous professional misconduct or criminal activities.
3. Perform technical due diligence to ensure the business is capable of producing the products and services it wants to sell to customers
4. Do market research to ascertain that there is a market for your products and services
Nahid Hasan is an IM Consultant and a part time blogger who loves to write about the IM industry, its tricks and tactics.