Let us learn everything you need to know before investing in a business. We will answer the real question, how much should you invest in your business.
Is it the right time to start a new business, buy new equipment, expand your inventory or run a broad ad campaign for your business?
Investing in business always comes with risk! But, every successful entrepreneur has taken risks to build their businesses. The key is to take calculated risks.
But, how can you take calculated risks? What if it is not the right time to invest? And, how can you decide how much should you invest in all these improvements?
Well, we’ll try to find answers to all these questions.
This article has three main sections
- How to evaluate your business finances
- How to evaluate your personal finances
- Setting up your business plan
How much can you invest in your business?
Before answering this question, you need to understand where your money is coming from.
The money, which you invest in your business, has to come from somewhere. If you are just starting a new business, it can be from your savings or a loan. Or, if you are already running a business, your investment can come from your (owner’s) share of the profits.
- If you are planning to get money from your savings, first you need to consider your personal finances, which we are going to discuss little later.
- If you are going to pull money from your business or to apply for a loan, you need to work out on your business finances to understand your possibilities.
Your business finances
Please remember that this guide is more focused on small-business owners, who do not have any accountants or financial advice in their staff. If you have accountants or financial advisors, they might be able to provide the best opinions for your business.
To understand your business finances, you need to have a good idea of your sales forecasts and the cash flow of your business.
It doesn’t matter whether you run a small part-time business or a seven-figure business. Always remember to have a good business plan and properly documented finances for your business. This will help you to analysis your business strategy and will save you from the headaches during tax calculations.
Create a sales forecast for your business
Remember, spending money that you don’t have is also an option for investing. You can always get a small business loan, which you can pay in the future.
So, how do you know whether your business would generate enough profits to pay-off your debts of the investment?
To do this, you need to make an educated guess about your future sales. We call this as creating a sales forecast.
How to forecast sales?
How can we make an educated guess about how many products you can sell in the future? There are a few things you need to look into.
Past data. If you have been already in your business, you might have tons of past data to help your forecasting process. Then you know the seasonality, sales patterns, and the growth rate of your business.
Statistics. You can find paid or free statistics related to your industry, to have information about industry analytics and predicted growth rates. Also, use industry statistics to understand the predicted price variations for your products and raw material.
Talk to an expert. You can always find a mentor or someone who is already in the same industry to get more insights. Ask about sales patterns and any predictions for the future.
Business deals. You might already have some signed deals for sales or sourcing for the future. For example, if you have already won any sales contract with a buyer or a sourcing contract with a wholesale seller for your raw material, you can use that data to create your sales forecast.
Download the spreadsheet template from the above link, and fill that with the data you have gathered.
Once you plugged in all the data, on the calculations page, you can find your calculated profit or loss for each month.
You can use this data to understand your possibilities of how much money you can pull out from your business or how much you can obtain as a loan to invest in your business.
Your personal finances
Well, if you maintain your business finances separately, and if the business is not your main income, you have greater flexibility to keep your saving off limit.
But, the truth is most of the small business owners, either use the money from their personal savings to start businesses or rely on the income from their business to live.
Here are two ways to see how much you can pull from your personal finances to invest in your business.
Record your monthly spending plan. Well, write down or use an app to record all your monthly spendings. Sometimes, you will be amazed to see how much you are spending on some categories. If you can, make adjustments to cut-down some from your lists. Sometimes, you might have to forget about your favorite Thai food restaurant.
But, be honest and make a plan that you can stick to.
Go through your bank statements. Your bank statements give the best data to see your spending patterns. Use this data along with your monthly spending plan to see how much you can really allocate to invest in your business.
- Do not forget to have an emergency fund before investing your money in your business.
- Do not forget to take irregular expenses (Annual payments etc.) into account.
Well, I cannot help from here onwards. You have to understand your finances and find how much money you should invest in your business.
Setting up your business plan
It doesn’t matter how well you crunch the numbers to figure out how much you should invest in your business. If you don’t have a business plan, you will never be able to save your investment.
A proper business plan lets you see where you are going with your business, and help you to understand when to step down.
Also, if you don’t have a business strategy, you will not be able to define your process. If you don’t have a clear process, you will start doing this and that.
Remember, you are going to start a business, not a gambling game. 😐
In the guide on How to plan your online business, I have covered below points.
- How to define your target audience and market
- How to identify the customer’s purchasing journeys
- How to define your Unique Selling Points to stand out from the competitors
- How to set KPIs for your online business
Even though it is focused on planning an online business, you can learn some important points, which are relevant to any business.
Let us wrap up
Starting or re-investing on business is always a risk. But, as an entrepreneur, you must learn how to take calculated risks.
In this article, we have discussed how to understand your business finances and your personal finances to calculate how much you can invest in your business.
Finally, we have discussed the importance of having a proper business plan to save all your hard earned money.
You need to take risks to win as an entrepreneur. But, always make sure to take calculated risks, and see how much you can actually invest in your business without breaking the bank.