Basic Tips for Investing in a Business

By Silicon Valley Blogger on 13 October 2010 (Updated 29 May 2014) 1 comment

'When I married Donna, I could get both hands around her waist,' said my husband's grandfather. Pointing at his full-figured wife, he boasted, 'Now look how much I got. That's what I call an investment!' — Katherine Eby, via Reader's Digest.com

In essence, that funny anecdote is right. Of course it doesn't sound very flattering to Katherine's grandmother-in-law, but that's exactly what investment is all about: making sure that your accounts and net worth grow bigger over time.

Investment is that exercise of putting money in a financial account, in your business, in a friend's business, or even in some other companies' business, for the pursuit of growing one's money. Investment is an effort to get one's money to "grow."

Investment works on the principle of "compounded interest." Interest that is added to your principal, or initial investment, itself gets to earn interest. So if you've initially invested $200, at the interest rate of 2.5%, at the maturity term of one month, you'll be earning $5 at the end of that month. If you renew the term of your money, your $205 will then earn $5.13 ($5.125) when another month is over. Certificates of deposit accounts or time deposits work exactly like this.

On the other hand, mutual funds work on the principle of snowballed profits. Mutual funds are as good as stocks and bonds, only you don't manage them yourself. Rather, trained financial experts are hired to manage your money. To invest in mutual funds, you can look into a broker that charges low commissions and check out their offerings.

Basic Tips For Investing In A Business

Investments could also mean those things you purchase or put money in, in order to further your business. Most people take additional studies in order to get the credentials needed to help them advance in their chosen careers. Other people invest in machinery, gadgets and equipment in order to make their lives easier. Then, most businesses invest in people which make up their workforce — their much-needed manpower.

Here are three informal rules of thumb by which you can measure your investments and purchases:

  1. Does it add value to your business?
     
  2. Does it add value to your personal workflow? Does it save time and help you finish your work faster?
     
  3. Is it an expense that will pay itself off in the future? What is your estimated return on investment?

If what you pay for holds up well to inquiries like these, then it's safe to say that you've made a good investment and have put your money in a good place.

On the other hand, there may be things that we may not see as outright investments, but end up becoming "money well spent."

One interesting financial tool is the credit card. It's a great tool when used wisely, but can also be a problem if used indiscriminately. If you apply for business credit cards as a way to organize your business' bills and expenses, you may find that doing so can be easier and can actually be helpful for compartmentalizing your finances.

In starting a business, one really does not need to have tens of thousands of dollars set aside or obtained on a loan for capital. Starting small is a good idea. As long as you manage your money well, and weigh each purchase or each acquisition against whether or not they add to the business, then you should be fine.

And if there is any advice we could leave you with, it would be these tips:

  1. Make sure your bills are paid.
  2. Make sure your accounting is in order.
  3. Make sure you know where your money has gone, is going and where it will go.
  4. Endeavor to create a product line that answers your target market's needs.
  5. Make sure that you please and listen to your customers.

One of the biggest pitfalls of a business would be sloppy financial monitoring or the lack of any monitoring altogether. You'll have less worries if you can have mechanisms in place to meticulously track your finances. Finally, the other side of your business involves customer satisfaction. Once you have these matters down pat, there won't be anything stopping you.

Good luck on your money-making ventures!

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Keith Warner

I enjoyed your article. For me, I always feel more comfortable investing in my own business that I have ultimate control over and can influence my "return" directly.