Business Proposal: Accept or Reject?

Should I accept or reject a particular business proposal?

This is the most common question that millions of business-minded individual ask themselves prior to entering into a deal. Very common yet so uncommon. Why? Well, if it's not then every new venture will be a success. This question is very important to be answered objectively (not emotionally!) because it might involve a capital worth your fortune. Just imagine if you have worked so hard as an employee for 20 long years of your life and your retirement pay will be at stake and if your project won't succeed you will end up living as poor as a dog? This isn't overrated but a reality. I had some investments that failed in the past and these are the things I learned from those and now I will be sharing these information so you will learn without incurring high amount of "tuition fees" of failing. You may consider asking yourself the following basic questions:

1. Is this a legit business?

              It is easy to do this, you just have to check with the regulatory institutions regarding the legitimacy of certain businesses. For sole proprietorship, you may check with the DTI and your town or city office to check for its business registration. For partnership and corporation, you may go to SEC and inquire about the business. Please be reminded that some businesses may require SEC sub-registration as well before it can operate legally.

2. Is this business my line of interest or something I would love to do?

          Interest is a very important ingredient to success. No one can ever be successful in his endeavor without interest, hence, it's a primary question to ask yourself. To answer this question, let's reduce it this way: What is it that I would love to do even I won't get paid for doing it? That thing in your mind is IT! Some people who love cars go into car dealership, those who loves to travel get involved into a travel and tour business, those who enjoy kids eventually put up a kindergarten school. All of these businesses are fueled by enthusiasm.

3. Is it feasible?

               Feasibillity of a business idea has a lot of angles which you have to look into. Does it offer or cater products or services that is needed by majority? Will it give you the return on investment ROI that you want?

                            ROI = Gains - Investment costs

                                          Investment Costs

And is the payback period ok with you? Payback Period is a financial metric that answers the question: How long does it take for an investment, acquisition, or action to pay for itself? Or, how long does it take for incoming returns to cover costs? Or, put still another way: How long does it take to break even?
4. How much capital does it need to put up such business?  

             It doesn't mean that if a business requires a half a million peso capital and you have a half a million peso savings then you will grab it right away. Don't get carried away by well-presented proposal. Remember that those who are looking for investors did their job in preparing that irresistable proposal with promises of high earnings. It does not mean  that you should not believe them but you have to apply a certain level of skepticism in studying the proposal. If they promise an estimated amount of One hundred thousand pesos of profit, think of how much working capital (the amount that is needed to keep the business in a healthy operation, liquid or in a state that it is able to pay its short-term obligations) will be needed to operate the business.

                          Working capital is also expressed as:

                             working capital = current assets - current liabilities

                Ideally, if the project requires a Php 100,000 capital, you must have a fund triple this amount for contingency purposes since a start up business undergoes a learning curve and will not be smooth-sailing in it's first few years of operations. Most of the businesses fall because of disregarding the entity theory concept which means to separate the business from it's owners. Capital will be eaten up by personal consumption if you will be withdrawing every now and then your business capital. So provide enough for it.

5. Does the business has a proven system?

                  If the proposed business has a proven system, then it's a plus. You will not be spending much on the errors by having a tested system. To make the customers happy is by speed and efficiency and it is best attained in an environment of efficient system. However, newbies with no proven system yet does not equate to inefficiency. They may be offering a promising business as well but you must take extra precaution entering in this kind of deal. I will expound on this in my next blogs.

     You must decide based on facts objectively. Study the details critically and impartially. You may consider hiring the services of people knowledgeable in doing feasibility studies. Remember that success in business depends from person to person, from your scrutiny of going into details and the level of risk you are willing to take.