5 Things To Keep In Mind When Investing In Business
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.
1.
Capital
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:
Personal Savings
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.
Bank Loans
Banks offer short-term, mid-term, and
long-term loans to business owners and investors to help start up and run their
businesses.
Hire Purchase
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.
Mortgages
Taking out a mortgage can help finance your
business venture.
Angel Equity
Selling part of your equity to a
well-respected industry leader not only raises financing, but it also offers
business connections, respectability, and credibility.
Leases
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-Ã -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
Author
Bio:
Nahid Hasan is an IM Consultant and a part time blogger who loves to write
about the IM industry, its tricks and tactics.
