Hello guys and gals, I am back! Anyhow, my topic now is about investment. And when we talk about investment we talk about a decision.
And If you will ask me, intelligent approach to a wise investment is knowing first the basic questions that you should ask yourself before you start your venture. These are —
1. How Much Can You Invest? This helps define what you’re prepared to lose on a venture. Contrary to what many entrepreneurial books suggest, starting a business is not exposing all your personal assets to risk but gambling only with what you can realistically afford to lose. I handle it by dividing my assets into the classical “touch”and “don’t touch” piles. For example, I’ll confine my entrepreneurial investments to only 25 percent of my liquid assets. That’s the formula I’m comfortable with, but you need your own formula, if in case. Once you set aside precisely what you are prepared to risk, you know your maximum investment capability while preserving your fall-back position. Setting limits is the only way to control losses.
2. How Much Should You Invest? Within the limits of what you can afford to risk is the decisionof what the business can justify as an investment. Consider the return on investment the business can offer and make certain it bears a rational relationship to the capital at risk. Many entrepreneurs make sizable investments only to discover the low earning power of the venture. Others understand the financial return won’t quite measure up, but go ahead because the business offers psychic enjoyment or a better lifestyle. It’s a fairtrade-off if that’s all you expect from the business. When financial return is important, your goal should be a minimum of 25 percent annual return on investment. The inherent risk of a small business doesn’t justify less.
3. How Much Will You Invest? What the business can logically justify as an investmentand what you will invest are two different numbers. The goal is to prune investment to the smallest possible amount. Cutting investment not only cuts losses but provides a better return onwhat you do invest. Starting business means investing as little of your own money as possible.
4. When Will You Invest More? Over-investment is most likely to occur after the businessis in operation. Many entrepreneurs start the venture with a reasonably small and prudent investment only to throw caution to the wind as they continuously feed the cash-hungry enterprise. Define later the criteria for a capital infusion.
And as a NOTE, before I start a venture I project sales. If the business is at or close to its targeted goal, I may loosen my pocket to release a few more money, but my eyes are always on the financial indicators. If the venture looks like a loser the investments stop. That’s the one cardinal error of so many entrepreneurs. Rather than admit defeat, they think that adding money is the cure. It’s expensive medicine.
Bong Corpuz & Co. CPAs 