If they are one of the people who want to enter the business world but do not have the necessary capital or are afraid to undertake. Given so many projects that can be presented, how can we choose the most solid and promising one? The methods are different, but one thing is certain for everyone, before making the final decision, it is worth arming yourself with patience, calmness, and calculating. And see well what are the reasons to invest in someone else’s company. What is at stake is the economic sustainability of the investment: in order to choose the correct destination of the capital, in fact, it is necessary to assess whether the flows of a company or an initiative are compatible with the profile of the expected income and expenses, and in what measure. Based on times and quantities. They must be aware and clear that making the decision to invest can be risky in many cases, remember that you will not be the ones who will control the company, in which you will make your investment. That is why we must evaluate certain aspects before considering investing as a shareholder in a company.
What should we evaluate before making an investment in a Company?
Just as we would look at our own personal investments, we need to think about what the ROI will be and what type of money we can make. For example in certain savings and investments, you can gather interest, and in this case, you may want to look at an interest calculator to see more. In business, you should also look deeper into the type of company they are and their reputation, if you are wishing to invest – in any circumstance.
The strategies used by this Company
Before you decide to make an investment in any company, first of all you should study and analyze what strategies they use. For this they must answer a few simple questions:
- What is the reason that customers will purchase this particular product and not that of your competitors?
- Is the market for your product large enough that it represents a differential with respect to the competition?
- How to achieve profitability covering the entire market?
If the answers to these questions are not positive and encouraging, it may be much better to abandon the idea of making this investment.
Reason why they need investors
If a company requires an investor, it is because it wants to use that money for a specific purpose. Knowing why the company needs your investment can help you decide if it is a good option or not. If the money they require is to cover salaries and / or general expenses, it is an indication that this company is not a good investment since I cannot even cover their basic expenses. Now, if your objective is to expand the company or make new investments that will generate greater income, then, then it can be a good investment option since the return on investment time must be short and the possibilities of profits much greater.
Analyze the entrepreneur and see if they are a true entrepreneur
They must be very sure that the people who are in charge of directing and managing this company are true entrepreneurs, and that they can lead and manage the business in the correct way. Many times they will be able to offer you an excellent product to promote, a very attractive investment project with very ambitious business plans. But everything can go downhill if the company is not managed correctly. That is why it is necessary that before investing, they take a good look at the profile of who or who will be in charge of running the company.
What are the benefits
When they invest in someone else’s company, it does not guarantee future money, even though the business is going the way they wanted it to. This will depend on the business owner and the agreement they have made. For this reason it is extremely important that before making any investment in a company, they reach agreements and make a contract that guarantees a participation and benefits according to the percentage they invest. Since they are minority investors, their participation in the decision making of the organization is very little. So it is important to ensure this point before closing investment negotiations.
Methods and Indicators to evaluate an investment project
The simplest and most basic analysis to evaluate an investment project is to make sure that the profits from this project exceed its total costs. There are very useful indicators that will help you understand why to invest in a project, and in turn, if this investment can be profitable or not. Before starting, you need to estimate the cash flow of each of the projects in which you could invest. For this, it is necessary that they take into account and understand these three categories of cash flow. After they determine the cash flows of the projects, they can choose the valuation method. You can find different methods with which to evaluate the expenses and profits of a project. Here are the following four methods used in business:
1) Recovery time
The payback period is the time it takes to get your investment back in the form of net cash inflows. This is a measure that initially focuses on the risk associated with the investment and not on the potential returns. When comparing the payback periods of various initiatives, we should choose one in which this value is lower, that is, a shorter payback period, as this is considered less risky. The shorter the payback period, the sooner the cash flows will feed the earnings. However, this method does not take into account other factors, such as the time value of money and net cash flow after recovering the initial investment.
2) The accounting rate of return
This evaluates the profitability of the project in which we are interested, by dividing the annual net income by the initial investment. For example, if you want to buy equipment worth an estimated $ 1 million. If the annual net income generated by this team is $80,000, its accounting return is 8%. When comparing projects, remember that the investments with the highest book returns are the most interesting. This is a frequently used tool for the evaluation of different projects since its use is very simple, despite this, it leaves aside some very important aspects because it is a very rudimentary tool. It doesn’t consider the notion of the time value of money, so the value of a dollar is higher today than it was in five years (since by investing today, you get a return). This method is also not cash conscious, a crucial aspect for any investment project.
3) The net present value (NPV)
Through the Net Present Value (NPV) method, the net financial gains and losses of a project can be measured. It is obtained by discounting all estimated future cash inflows and outflows, this will produce the positive or negative balance of the cash flows generated. Although the exact value of a project is only known at the time of its completion, the NPV allows contractors to know the time value of money to determine whether or not the project is feasible in the long term. Choose the method that best suits your needs. Each of these methods has its advantages and disadvantages, so it is advisable to use more than one for a given project. Also, a qualitative analysis is just as important for a project
In the end, they may see that the rate of return of a project is not ideal, but they could still decide to move forward, analyze what would be its impact on the activity plan of this business in the long term. You’re ready for much success in your decision.