What is screening?
Screening, in the world of finance, refers to the process by which you decide whether or not to invest your hard earned cash into a particular business venture. The process of screening for a new business is a lot like the process of dating a new person. You have to do your homework and consider all their possible benefits and detriments before you make a final decision on whether or not you will pursue them further. One major difference between dating and screening, however, is that while it is okay to screen out 99% of the people you “date” during your lifetime, it is counter-productive to screen out 99% of possible investments during your lifetime. To see why this is important, read on…
Why risk screening is so important
- Risk screening is a numbers game: As stated before, it is more advantageous for you to risk screen as many investments as possible as opposed to risk screening as few as possible. This is because the probability of achieving a desirable outcome increases with the number of opportunities you consider. That said, it’s probably not feasible for you to consider investing in every single investment that comes your way, hence the importance of risk screening.
- Larger amounts lead to larger returns: An interesting thing about investments is that they become exponentially more profitable the larger you make them. Let’s say, for example, that you have the choice of investing $1000 in a business or not investing in one at all. Let’s also say that your risk screening process concludes with you finding out that the business has a 75% chance of being successful and a 25% chance of failing. That means there is a 3/4 chance you will succeed. If the business succeeds, it will generate $1500 for you (since you invested $1000 and got $500 back). If, however, the business fails to succeed, it will only cost you $500 (you invested $1000 but got nothing back). Therefore, you stand to lose less than you’re guaranteed to gain. What’s more, the larger your investment into that business is, the larger your rewards will be. For example $5000 into $1500 is $3360 profit. $100 into $500 is still a loss of $400 no matter what happens, but it’s nowhere near as significant as when you were risking only $500 in the first place!
- Money leads to more money: Another thing about investments is that they tend to lead to more investments. This may sound confusing at first, but let me explain further. If you invest successfully in one business venture for instance, then that means you have more money in your bank account than when you started out with. This extra cash then gives you more money to invest in other ventures, which leads to even more money. Thus, the higher amount of money you have, the higher amount of opportunities you will have for your investments. This is why it is important for you to risk screen as many investments as possible, because this will give you plenty of opportunities to pursue later on down the line.
How do you make sure your screening process is effective?
- Have a plan: To make your screening process effective, it’s important that you first have a plan set out for yourself already. Without a plan, you will be full of doubt and uncertainty about the businesses you decide to invest in or not. If you decide to invest in a business for example, then that means that your plan predicts that the business will be successful and generate gains for you. Having a plan also allows you to be sure of yourself and know why you are making the decisions you are making. This is important because if your screening process is effective and allows you to avoid investing in bad businesses, then it follows that only good businesses will be left over for you to invest in, thus creating more opportunities later on down the line.
- Make it a priority: Just like dating, there are lots of other things in life that can distract us from conducting effective screening processes. A common mistake that many people make is that they focus on making lots of money for themselves instead of on risk screening. We all want to make more money, but if you don’t take the time to screen effectively, then you may never actually get to make any money in the first place!
- Have the right tools at your disposal: If you want your risk screening process to be effective, then you will need to have all the resources and knowledge available at your disposal. Look for investing blogs and websites that offer help in this area and always keep your eyes and ears open for useful information.
- Get in touch with experts: Another thing you can do to make your risk screening process more effective is to contact experts that have valuable knowledge in the area you’re working in. The more chances you have of finding people who will be helpful towards your screening process, the better off you will be. This is because when it comes down to it, these people understand what you’re going through, and they’ll be able to give valuable advice based on what they know.
- Take action: Doing something is usually much more effective than merely talking about doing something. That’s why it’s important for you to look at what you can do and what opportunities there are out there for you to invest in so that you can take action and begin your risk screening process right away.
- Basically, just keep working: If you want to make sure your risk screening process is effective, then make sure that you continue to screen as many investments as possible. That way, the higher amount of investment opportunities you will have, the more chances of bad businesses being left over for you to avoid investing in. In addition, the more successful ventures you get to invest in, the better the returns will be.
The bottom line is that effective risk screening is a vital part of all investing. Managers are always advised to make sure risk screening is a priority because it could become their biggest asset in the long run. Risk screening is a delicate process that requires a great deal of expertise in various areas of knowledge. Hence, it is best left to professionals to handle. Firms lacking the needed expertise can look to Fintalent, the hiring and collaboration platform for tier-1 M&A and Strategy Professionals for all of their Screening Consultancy needs. Fintalent’s consultants are sure to bring their wealth of experience and expertise to bear in helping grow your business.