An investor is a person or organisation that puts money into financial schemes, property, products and processes with the goal of realising a profit. Investment is big business for both the investor and those they invest in. You may have the goal of attracting investors to your business and whether you are going to receive a small loan of a million dollars form your relative or go out there and apply for funding there are fundamental needs investors have. This is an essential list and you should really have these available at any time in conversation.
You are investor number one
While the idea of investors is usually targeted at external investors we have to look at the most important investor in any business, investor number one: You! You are investor number one in your business and these measures are also measures you should be looking for in your business even if it is still at the idea stage. Now let’s look at those measures.
Return On Investment
This is a really simple matter of how much money comes out versus the money you put in as a percentage. However, there are slightly more complex extensions of this which can confuse people a little but have their uses. Return on investment simply looks at the complete investment made in the business or project versus how much was realised from it. This is usually looked at on a year by year basis, comparing the annual income to the total investment. ROI is the bare-bones idea of how much the business will make for the investor.
Pay Back Period
The Pay Back Period is another measure investors love and with good reason. Say an investment idea required $15000 and paid $2000 a year. It would take the investment 5 years to pay back the investor the money they put into the project. Please note this is not regarding the investment as debt, the holding in the investment continues but it does tell the investor how long they can expect to have their money tied up in the investment. Say you used your savings to start your business you could have your money back in your savings in 5 years assuming you withdrew the entirety of the revenue.
The gross margin is another important figure for investors but it looks more at business operations than the final output. The gross margin is simply the revenue realised from selling products less the cost of selling the products. This can be looked at for the entire business or on an individual product basis. Gross margin is important because it is informative of just how much money the business will have to put towards overheads, customer acquisition cost and net profit. Simply put the greater the margin the more money the business has to fund its operations.
Net profit is the profit the business makes after deducting operating expenses, tax, interest and other overheads. This tells an investor how much money is left after operating for distribution to the investor or capital expenditure. This is literally where investors eat or grow the investment or both. A business may have a good gross margin (or gross profit) but be burdened with overheads to the point of reducing profitability to a level that will not remunerate investors well enough. This is the same profit that is used to calculate return on investment.
Break Even Point
We spoke about the Break Even Point before and how important it is to a business so you can read that for a little more in-depth understanding. For the purposes of this discussion, we are looking at BEP from an investor perspective. Investors, in theory, shouldn’t be overly concerned with day to day issues but it will be important in bringing new investors on board. Investor number one will definitely be interested in this, however. Among other things, the break-even point will tell you how many customers you need to make a zero profit or for a certain targeted amount of profit That number will also inform your working capital requirements and it ties nicely into the final measure in this article.
Customer Aquisition Cost
The customer acquisition cost is the amount of money it will cost you to attract customers. While we tend to believe if we build it they will come business doesn’t actually work like that. This is where you have to spend money to make money. Advertising, social media management, discounts and promotions all have a cost. It’s not just internal, it’s the cost of competing. Google, for example, pays mobile manufacturers to use google as their default search engine on their devices. Calling back to the break-even point and gross margin we can quickly see the implications of a high customer acquisition cost.
These are not the only measures, of course, investors will want many more and deeper ones. However, armed with these 6 you can have a really good elevator pitch that quickly informs them of the things that will certainly have their interest. These are also really good metrics for you to know about your business.