Making a Big Business Purchase? Do These 4 Things First

Jan 15, 2016 Blog  Business Finance , Entrepreneur , RainFin
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Investing money into a big business purchase is often an essential step in expansion. While your business may be doing well at its current size and capacity, new equipment, new locations or moving into new markets could provide you with more opportunities to acquire and retain customers, make sales and make money.

But expansion can be risky. Any purchases based on speculation need to be carefully considered and researched. Being able to anticipate any risks and create managing strategies is essential for protecting your existing assets.

So, here are the four things you should consider before making a big business purchase.

1. Assess your business, honestly

As a business owner, entrepreneurship and ambition will come naturally to you. But sometimes that self-belief can drive people to make hazardous decisions.

Before investing in a new property, piece of equipment or moving into a new market (e.g. selling through a website) – think about your objectives. Will this investment help you stay ahead of your competitors? Increase your productivity? Are there other ways you could make your current business more efficient before thinking about growth?

The benefit of this action is that you’ll have a happier staff force. Having happier employees means that you’re likely to have a lower turnover, reduced absences and increased productivity. So you could quantify benefit by figuring out the costs of finding and training new staff, the financial impact of absences, and what you might gain from a more productive staff force.

If you’re taking a loan to pay for a purchase, remember to include the interest accrued over time to your initial cost.

2. Depend on scalability

 It can sometimes feel like a safer option to invest in cheap, quick-fix solutions to your business needs. But these can end up costing your business more in the long run as you deal with inefficient systems or poor products which hinder your ability to process growth. Don’t just think about solutions for today and tomorrow. Think about what will still work for you in a year’s time.

3. Do a cost-benefit analysis

As the name suggests, a cost-benefit analysis compares the cost of a decision directly against the benefit. Both the cost and the benefit should be considered in financial terms.

So, let’s say you’re thinking about buying a vending machine for your staff room. That might sound like something that would be hard to qualify in terms of financial benefit, but you know that your staff would appreciate it.

So, you decide to buy a snack machine at R47,310. There’s your cost.

The benefit of this action is that you’ll have a happier staff force. Having happier employees means that you’re likely to have a lower turnover, reduced absences and increased productivity. So you could quantify benefit by figuring out the costs of finding and training new staff, the financial impact of absences, and what you might gain from a more productive staff force.
If you’re taking a loan to pay for a purchase, remember to include the interest accrued over time to your initial cost.

4. Don’t forget cash flow

There will probably be an initial impact on your cashflow from making a purchase, however in the long run you may improve sales or save on operational costs.

Create a cashflow forecast based on making your investment. This will give you a good idea of how your cashflow will be affected in the long run.

5. Give thought to what time of year it is

Sometimes you can get the best deals if you delay purchasing until certain times of the month or year – when business is slow for suppliers. If your needs aren’t urgent, why pay more? Be tactical.

6. Review your financial options

 It’s not always necessary to purchase something in order to make use of it. Think about:

Leasing – If you only need something for a specific period leasing can be an option. Be aware that leasing often ties you in to contracts and you could end up paying more than the cost of an initial purchase. For example, paying a freelancer to design your webpage VS leasing a piece of software and doing the work yourself.

Renting – This is a good option if you only need equipment or property in the short term – or if it will become obsolete in the near future.

However, if these are not appropriate, you will probably need to thinking about funding a…

Purchase – Purchasing means that the item is yours as soon as you have completed the transaction. This may be the only option available to you – for example, if you are buying materials to fulfill a large order.

For many business purchases you may not have the capital immediately to hand. In this instance you might need to take out a loan to finance your purchase. Be certain to do a full review of the funding options available to you. Banks take time to process loan applications, which can be unsuitable; and other lenders can offer deceptive rates and unmanageable repayments.

Look for lenders like RainFin, which amortize your loan over the length of borrowing, giving you manageable repayment rates. Plus, your loan could be funded and the money in your account by the next day. See if you could qualify for a RainFin loan, here.

Always make sure you thoroughly examine the long-term financial impacts of borrowing money. And before making a large purchase or investment for your business – do your research!

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