Business finance - WJECInvesting

Investment in your company

Another way of accessing money for your business is to get an investor. You may have seen the BBC TV programme Dragons’ Den, where entrepreneurs pitch their business ideas to potential investors. If the investors like the idea, they invest their money into the business.

In return for the money invested, they will either take a share of the business or an agreed income. Their hope is that the business does well so they get the money they invested back and, if possible, earn more money than they had invested.

It could even be the case that you are the investor and you will have to consider carefully whether you think the investment will earn you money.

Example

You inherit £5,000 from a late relative and have decided to invest your money in the following business. Vintage for You is a company that sells vintage fashion wear and accessories. The company is valued at £120,000 and looks to make a net profit of £25,000 in year 1. This is projected to increase by 10% the following year. You have been offered a 5% share in the business if you invest your £5,000, which means you’ll have a 5% share in the profits. Will you make your money back within the two years?

Solution

Year 1 profit: £25,000.

Year 2 profit: 10% of £25,000 = £2,500.

£25,000 + £2,500= £27,500.

Total profit = £25,000 + £27,500 = £52,500.

Your share of the profits is 5%.

5% of £52,500.

5/100 × 52,500 = £2,625.

No, you will not get the £5,000 you invested back within the two years.