Without measuring and tracking business investments, business owners are missing a critical piece of information about company performance.
Understanding the Cost of Your Investment
Your first consideration is to ask the question: Is the magnitude of your investment really paying off?
- Small business owners must understand their investments both into the business itself, and in the companys assets in order to calculate return and obtain critical information about company performance.
- Different business entities use different accounting methods to compute investment. Consult a tax professional to get an accurate calculation for your business.
- Track the return on investments over time to understand if youre investing enough and where improvements/upgrades need to be made to improve your return.
Every small business starts with an investment. But smart business owners will know their investments inside and out, gaining critical insight into the companys success in the process.
There are two main reasons to take the time to understand your business investments.
The first reason:
The first reason is that when it comes time to sell the company, the business owner needs this information to calculate his/her gain or loss.
For a regular corporation, known as a C Corp, the investment is typically whatever amount was put in when the business was purchased or founded. In partnerships and S Corporations, the investment cost is more complicated, including both the outside and inside basis.
The outside basis is the amount put into the company when it was purchased; the inside basis an ongoing amount of investment that changes every year, increasing if the company had income and decreasing with any distributions of income. But this is only part of the calculation.
Regardless of the business entity, small business owners should consult a professional tax preparer or CPA on an annual basis to comprehensively calculate their investment.
The second reason:
The second reason that keeping track of the business owners investment is worthwhile is that it gives a real-time window into how well the investment is paying off in terms of improving the business. After all, investment is not just limited to the business itself, but also includes business assets such as machinery and equipment, trademarks, intellectual property, and any other assets the business may own.
By tracking all of the investment into a business and the returns on those investments, the business owner can better understand if the level of investment is generating enough of a return, if its time to replace or upgrade certain assets to improve return, and of course, how much those assets are worth in a future sale of the business.
Without measuring and tracking business investments, business owners are missing a critical piece of information about company performance. Understand your investment to understand your business, and ensure your companys long-term success.