Deciding on Rate of Return
The tendency in most
entrepreneurs is to hope for as high a profit rate as possible. Even so, the minimum acceptable return often differs
from one person, group or organisation to another. As an investor, then, you
have to see, for starters, if a business gives the least profit satisfaction you
would be content with.
Understanding the Type of Business
An appreciation of the kind of scheme
one is considering having an interest in is important. You do not necessarily have
to be expert, but merely familiar with the general behaviour of the particular
business type. What is required is such basic knowledge as would make possible
forecasting of sales.
Reading the Business Environment
This is a highly complementary
issue to the preceding one (understanding type of business), as business can
only be fully comprehended when viewed relative to what surrounds it, or could
surround it at some point in time.
The business environment includes
competition and government policy. Not to be ignored, however, is what lies inside the business, such as the capacity
of the employees. It all helps an investor see what fortunes or misfortunes are
likely to lie ahead.
Estimating Payback Period
This is closely related to rate
of return (the higher the rate the more quickly costs are covered).
There must be calculation of what
length of time it will take to recover the capital outlay. Less time generally
means less exposure to hazard. Allowing a long payback period means so many
things could potentially happen to change the course of business from good to
bad.
Considering risk or uncertainty
Risk is danger that is known and
may be estimated, while uncertainty is a threat that is not predictable, and
may even be difficult to measure. Examining risk or uncertainty greatly helps
in getting a more complete perspective of the profitability of an investment.
Where too much risk or
uncertainty exists, it is naturally wiser not to stake any assets.
Assessing Participation Level Needed
Some investors would like to take
part in giving direction to the business while others would rather be largely passive.
Measuring Free Time Allowed
Even when one would like to be
part of active management, they may wish to dedicate some time to leisure and
other interests. If an investment does not permit you time for other life
pursuits, it might take fullness out of your life. It therefore cannot be said
to be a good enough venture to get into.
Gauging Ease of Divesting
Once an undertaking loses attraction
(profitability, essentially), it should be relatively easy to retrieve the
resources put in it - or what remains of them - so that they can be used in
another type of endeavour.
Conclusion
Experienced business people and
scholars are aware that part of the game of investing well is diversification
of risk. It is the old adage of not
putting all one’s eggs in one basket. It is better to have an asset
portfolio spread over, at the least, two ventures. These also should advisably
belong to different sectors (in simpler terms, you could invest in a mine and
in a tourist resort). It stabilises income flow and thus shields against sudden
and total fall from riches to rags.
