How and how much to invest in your business?

How and how much to invest in your business?

The business works and the owner wants to develop it further. There are many ideas, but also many doubts: what if the venture fails and the money is wasted? What if today we buy a car, and tomorrow there will not be enough money for taxes? What if we invest too much in development, and the business will go bankrupt?

Let’s look at how to invest your company to make it a success.

Count the profits

You should develop your business at the expense of net profit, because if the company is loss-making in its current state, then attempts to expand the business at the expense of credit will only drive you deeper into debt. But profits need to know how to properly count. Receipts are not always income. Any advances and prepayments from clients are assets, which entail counter obligations. To “appropriate” this money, you will first have to ship the goods, perform work or provide services. After all, the customer may change his mind, then the deal is off and the money will have to be returned.

And vice versa. If the entrepreneur didn’t pay the rent, goods, materials or contractors in time, it doesn’t mean that he saved money. The money will have to be paid back sooner or later, which means that the entrepreneur has obligations – expenses that need to be taken into account.

To calculate profit, you need to collect income and expenses in one table – you get a profit and loss statement. The following items need to be included in the report.

The income part.

Revenues on the obligations fulfilled.

Other income that the business received from other than its main activity. For example, the company gave its partner a loan with interest. The amount of interest is also the company’s income, but not the main one, but an additional one.

Expenses.

  • Operating expenses: accrued salaries, insurance premiums, liabilities to suppliers, contractors, landlords.
  • Depreciation of machinery, equipment and other fixed assets.
  • Interest on loans, which the company took for its needs.
  • Taxes that the company must pay to the budget under its regime.

The difference between the income and expenditure part is the final profit of the company. You can create a report in tables yourself or use special services for this. For example, our management accounting service generates a profit and loss statement automatically.

Set aside money for development

The entrepreneur has made a profit and loss statement for the year. According to the report, it turns out that he earned two million net profits – you can invest in development. But here’s the problem: there are only 200 thousand rubles on the bank account. Why? Because the business is running and some of the money is in circulation. Three days ago a payment came in from a client, yesterday all the suppliers’ bills were paid, and tomorrow the taxes need to be remitted. Where do you get the money you need? Accumulate: regularly set aside a portion of the receipts.

Usually the entrepreneur thinks out in advance what amounts and how often he will be able to save. For example, the entrepreneur has decided that every time he receives a payment from a client, he will set aside 10% for a safety cushion and 10% for a development fund.

It is better to keep the funds in separate accounts, so that there is no temptation to spend them improperly.

Calculate how much it will cost to implement the idea.

Sometimes the idea of development looks attractive, but in fact it will pay off too long or even be unprofitable. So first it makes sense to build a financial model and play in it different scenarios. We told you about how to make a financial model in this material.

The financial model will help to find answers to important questions.

1.How much money should be invested in the idea at one time?

Usually the most serious costs a business incurs in the first phase of implementing an idea. If you lose sight of some of the necessary expenses, you may not be able to meet your budget.

For example, the entrepreneur decided to replace the equipment. New equipment will help save raw materials and energy, and increase production. The entrepreneur finds out from the supplier the price including delivery, installation, and debugging, figures he has just the right amount, and pays the bill. The equipment was brought and installed, but it turned out that the employees did not know how to use and maintain it properly. It was necessary to send the employees for training, but the available money had already run out. As a result, development funds are spent, and the new equipment stands idle.

2.Will the idea pay off, and when will it happen?

Monthly income and expense planning will help you understand whether the idea will pay for itself in the foreseeable future, and whether it makes sense to bring it to life. We talked about the payback of a project in a separate article.

For example, an entrepreneur has three million roubles. In order for the idea to work, he needs to invest two million at once, and then every month another 300,000 roubles for advertising. The entrepreneur analysed the financial model and realised that the idea was profitable. But with the most favourable forecast, the project would pay for itself in eight months. That is, the entrepreneur did not have enough money to fully implement the idea. So he postponed the project until the necessary amount is accumulated in the development fund.

3.How will the realization of the idea affect the amount of profit?

Building up turnover does not always translate into more profits. Why this is the case, we told in detail in another article.

It is important to calculate in advance what awaits the business if revenues grow by 10, 20 or 30%. Analyze how costs will change, how much profit the business will be able to earn under different scenarios.

For example, the head of a network of service centers decided to hire a marketer and invest in advertising. The marketer worked very well and the flow of clients increased. The company had to hire more employees and expand the leased space. But the high cost of rent had a negative impact on the financial result: revenues increased by 20%, and the company did not wait for profit growth.

Launch the project, but do not let things drift away

The calculations of the financial model confirm that the idea is really worthwhile. The development fund has been accumulated and is waiting in the wings. It’s time to make the idea a reality!

But don’t leave the calculations to gather dust on a distant shelf. Plans rarely work out 100%, deviations are inevitable. Now your main task is to control the progress of the project. Regularly compare the planned figures of the financial model with the actual state of affairs. This will allow you to see and solve problems in time.

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