Factors to consider before investing in a business

productThere are many people whose idea of investing is to put their money in business so as to because it has ability to generate cash and make profits for them within short time. It is however not all the time that a business will do well.

Expertise in specific business

Some businesses are not suitable for everyone therefore it is essential to make all the necessary considerations before investing in a business as a sole proprietor or with other people. It is better off to invest in an industry that you have knowledge in as you are better suited to determine its full potential.   When you have experience in a business, you can use it to determine if investing in that particular business at certain time or place is worth it.

It also helps to get objective data about a business in order to weigh the rewards and risks objectively.  Use your experience and research to assess if your ability to operate a business. Also determine the key h partners and employees you require to run the business smoothly.

Before you invest, it is important that determine where, when and how you will invest by considering the following factors:

Financial performance

The initial step to assess whether a business investment will be good is by determining its profitability potential. If you are injecting money into existing business, it is practical to check how it has performed in the past. When buying a business, get financial reports for the last 2-3 years. These reports include:

  • Tax returns
  • Budgets
  • Balance sheet
  • Cash flow projections
  • Current account receivables
  • Profit and loss statement

When you examine the above carefully, it will help you determine current worth of a business, sales and expense trends which in turn reveals strengths and weaknesses. Pay much attention to the balance sheet as it lists current net worth, assets and liabilities of a business.

Analyze the market

Things in all industries and the community that they target do not remain the same for long.  Target customers and marketplace are essential assessments that you should make before sinking your money into business.  For instance, if   main customers of a business depend on   middle aged, it is important to check if the local population is getting older or younger with time. Talk to the customers about the changes in their needs that have caused them to consider changing their allegiance to other business.

Evaluate the competition and determine whether there are certain competing businesses offering services or products that will see them gain market share into the business you intend to invest in.

 Capital to invest

Operational or start up capital is one of the key things in making a business to grow or fail. Apart from the selling price of a business or amount required to become a partner, it is essential to examine the credit needs and operating capital. Review the cash flow, access to credit, accounts payable and receivables to determine whether the business has enough funding to keep it stable when you are going through learning curve.

Failure impact

Although investment is said to be a gamble, you do not have to make a blind highly risky gamble. It is important to determine impact of a business failure is likely to have on personal financial basics-of-investingsituation including credit and retirement savings. Some people take the risk of using personal assets to temporarily stem business crisis. The danger is that if a business does not turn around, an investor may end up in personal bankruptcy. It is important to set a cap on whatever you will risk and be prepared to back off with some controlled loss at the capped number in order to protect personal finances.

Risk tolerance level

Generally, a business with higher invest risk has more potential to get higher return that low risk investments. People however have varying tolerance levels for the kind of risk they can make with their money. For instance, the stock market has potential for high returns but it has many ups and downs which can be too much for comfort to some people.

If you are averse to risking that amount of money required for potential higher rate of return, it is not worth the accompanying anxiety. If on the other hand you have a personality to tolerate loss of money for possibility of getting higher profit on investment, you can choose aggressive investments like growth stocks.

Time within which   you need your money

It is not every time that you invest to retire. Some of the investments you make are for shorter goals.  It is therefore necessary to consider the time within which you want to have your investment in business before turning it into cash.  When you invest for longer time, you take more risk and possibly get more gain as you can still recuperate from potential loss. If there is not much time to invest or the risk of longer investment will be disastrous to investment plan, it would be better off for you to out your money in less risky investments such as bonds.

You should also know that there are some investments that incur penalties or charges if they are redeemed or surrendered before a certain holding period. If there is a condition, make investments when you are sure that you will not require your money before prescribed period. Also consider tax implications that are likely to occur if you withdraw your investments earlier.

Objective for investing

If you want your money to be relatively safe as you will need it soon, go for safe investments such as bonds. For better appreciation of your money, take moderate risk with the money as you will not need it soon. If you ready to make aggressive risks, make investments that will bring higher gains and have potential for growth such as investing in companies that reinvest earnings back to the future.