Identifying When To Invest
Updated: May 16, 2018
In a prior post ("Business Cycle Risk") I explained the importance of understanding what part of the business cycle a business operates within to manage risk. We explained that being at the end of a business cycle doesn't mean not to take any risk, but to scrutinize projects or investment activity more. In this article we will explore further what criteria small business owners should use to determine to take on risk.
The first step to access whether a project or a new product line should be invested is it should be quantified. In other words modeled. Following our 5 STEP PROCESS TO HIGHER PROFITS one can create a model & then forecast the project. Further if appropriate different scenarios can be modeled with corresponding probabilities to determine what return is most likely. The goal is create a project's or product's (whatever the investment maybe) ROI or Return on Investment. By determining an investment's ROI it then can be benchmarked against the company's overall ROI. For example, if a company's ROI is say 15% and it is entering the later stages of an economic cycle thus encountering higher risk the project under question should require a higher return to compensate for that risk. What that higher return is up to the business owner to evaluate and with our help to determine it. But suffice it to say if the project only promises say a 20% return or only an incremental 5% is that really worth it to take on the risk of stressing a company's cash for a new venture or project only to get an incremental 5% return vs its core products? Probably not if there is a high risk of recession or a slow down in business. Maybe the threshold is 30% or 2X depending on economic risks and company specific risk taken on tied to the project.
Business & personal success isn't based on one choices its a series of them over long periods of time. Decisions on investment's shouldn't be based on qualitative reasons, but quantified so they can be compared and analyzed. To gain from our insights please contact us or sign up for email updates via https://www.charlotteconsultantservices.com/news-update.