Friday, October 2, 2009

a financial mistake most business owners make

What could offer the biggest potential returns of your investment? A profitable business. It can turn P1000 into millions but it can also turn into 000. Putting some money into a business is a must for any investor. Aside from the possibility of raking in profits, having a business actually helps you understand investments better. To quote Warren Buffett, "I am a better investor because I am a businessman and a better businessman because I am an investor". When it comes to learning about finance, running a business is the best teacher. We also need to apply investing principles in our business and what I would like to emphasize is the concept of diversification. A financial mistake most business owners make is the lack of diversification. This is especially true to small business owners. Let us illustrate with the typical lechon manok business. A young entrepreneur decides to start a lechon manok stall. He has great tasting chicken, has good location and people buy it. Needless to say, the business became profitable. He then invested in another lechon manok stall and it also became profitable. After a few years, he had many stalls, some are profitable, some are not. He kept on investing his profits into more stalls selling his delicious chicken. Then came the news of a new disease that comes from poultry. Suddenly, people stopped buying his product and slowly, his business dried up. Since all of his cash comes from that particular business, he lost almost all income. Here are some points to consider. First, understand that all businesses undergo cycles. No matter how successful your business is now, there will come a time that it will undergo setbacks and experience the bottom part of a cycle. Next, never assume that your business will last forever. It is better to assume that at some point in the future, your business will go bankrupt, therefore you need to prepare when that time comes. Lastly, never put all of your eggs in one basket. This is true in business as well as in investing. A good strategy when you run a profitable business is to regularly set aside a percentage of your profits into investments like mutual funds, special deposit accounts and real estate. Do this regularly and stick to the percentage you have set. For example, if you get a net profit of P20000 for a particular month from your business. You set aside P4000 and place it in a mutual fund, set aside another P4000 and use it to expand your existing business and set P2000 to venture into another business. You then pocket the remaining P10000. Proper allocation will ensure that you have something to rely on should your business face problems later. To summarize, never pour all of your profits back into your business.

1 comment:

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