Surviving Isn’t Enough
The past few years have not been easy for small and medium-sized businesses in Israel. There have been local and international economic crises, uncertain security situations, foreign exchange volatility, and credit lines from banks have become harder to come by. These factors combined have thrown many businesses into permanent survival mode and some, even to close down. Therefore, looking at an enterprise from the point of view of returns rather than merely staying open is not that simple. In this article, however, we will try to guide you towards seeing your business as an asset in which you have invested resources, time, energy and—let’s not forget—a significant part of your life.
Ready? Let’s get started.
For illustration purposes, let’s say you’ve bought stock. The share cost you ILS 100 and paid you a dividend of ILS 5 after the first year. That means an annual yield of 5% on the stock. A simple calculation. We will apply this same idea to investing in a business, and perform a sample calculation to show this.
Calculation of Investment in a Company
These are the main items to consider:
- Personal Funds Transferred to the Business as Loans or to Cover Business Expenses – Let’s assume for the purpose of this calculation, that loans to the business were at ILS 250,000 and every month the owner pays ILS 2,000 of business expenses out of their own pocket.
- Opportunity Cost – Assume the business pays the owner a salary of 10,000 NIS per month, but if the owner were employed elsewhere in the market, they would earn 14,000 NIS a month for the same work. In other words, every month the owner invests an opportunity cost of ILS 4,000 in the business.
- Cost of Being Independent – When it comes to going out on your own, especially at the beginning of the journey, the owner invests way more hours in the business than a regular employee. The extra working hours you put in at the expense of leisure and quality time with your family, can be estimated in financial terms. Every self-employed person invests another ILS 5,000-10,000 a month at work, which for the purpose of the calculation we will put at ILS 5,000.
Now let’s do the math:
| Monthly Expenses/Costs | Total Invested | |
| Loan to the Business | 250,000 | |
| Business Expenses Covered by the Owners | ILS 2,000 for 24 months | 48,000 |
| Opportunity Cost | ILS 4,000 for 24 months | 96,000 |
| Cost of Independent Business | ILS 5,000 for 24 months | 120,000 |
| Total Investment | 514,000 |
