Investing in the future - Part 1: Introduction
When we think about investment we invariably think about purchasing a capital asset: as in 'The company plans an investment of £400,000 in new machinery next year'. This is the traditional but limited view of investment where the concentration is on the acquisition of fixed assets.
The reality is that an investment is 'something on which a business spends money in order to earn more money' and this definition includes all the time and money we have tied up in the business. These total investments are not always easily realised into cash and can easily be lost to us. These investments are what we have put into the business or have at risk should the business fail. This is a broader definition of investment but it does reflect the reality of being in business today.
In general terms we invest every day in our business, although many of the investments are classed as expenditure because of the traditional focus of investment thinking on fixed assets. This series looks at investment from the broader definition and includes aspects which are not traditionally regarded as investment but are certainly things we spend money on in order to earn more money. The series is not only about spending money but also looks at areas where we can reduce the investment (via working capital) that we have made in our companies.
The areas covered are shown in the diagram, the people are at the centre because without them you can do nothing and the performance measurements are outside because you need to assess how good your investment has been.
The conventional accounting treatment of investment is largely based on criteria such as Net Present Value (NPV), Return on Investment (ROI) and Discounted Cash Flow (DCF). These assessment methods look at the pay back and financial implications of an investment and provide a method for judging the financial impact of the investment. These methods are well documented in any accounting textbook. The numbers tend to focus on the short term financial aspects of investment rather than the longer term strategic needs of the business. They cannot look at the strategic cost of 'not investing', which can be far greater in the longer term. To paraphrase Oscar Wilde 'The numbers give you the cost of everything but the value of nothing' - the value of an investment must always be assessed by the management of the company.
There often a need for two classes of investment criteria to be applied in a business:
- Traditional Investment Criteria - based on the traditional numbers and firmly supported by these.
- Strategic Investment Criteria - based on the need for the company to remain in business in the coming years.
One of these criteria needs to be applied to all of the investment made in our companies.
Henry Ford once said 'If you need a machine and don't buy it then in the end you will find out that you have paid for it anyway and still don't have the machine'. Whilst this statement was made about machines it is equally true for almost any investment that your company needs to make. Investment is necessary to continue to compete in the marketplace and the company that does not invest will surely find itself becoming uncompetitive and will eventually cease to exist. If your aim is a short term one of cash generation and removal then this is acceptable but if you want to be in business in 5 years time then you need to consider your investment programme very carefully on a continuous basis.
Re-investment approaches will vary from company to company and from country to country and will tell you a lot about where the company or country is going in the long term. Perhaps the most graphic examples are Germany and Japan - as a result of the 1939-45 war they were forced to re-invest in all new machinery but because of this they effectively won the peace. This enforced investment was building for the future and has been remarkably successful - in contrast to the UK where antique machinery can often still be seen operating ineffectively.
Before making any investment it is essential that the proper resources are available to the company. If these resources are not available then the investment is probably set to fail before it has even been made.
The major resources needed are:
Financial resources - Without the right degree of internal and external resources most investments will not be successful. Even for strategic investments the costings need to be made and to be accurate. The effect on the cash flow of the company is particularly important.
Human resources - Investment programmes need the right human resources. This might mean training staff, hiring staff or even redundancies. Some of these will only be required during the implementation phase but others will be permanent. High technology machines may require less operators but often require more highly skilled maintenance staff to keep them going, this is rarely recognised and included in the investment costings.
Management resources - Investment programmes require management and it is important to invest only what you can manage. It makes no sense starting on an investment programme of any size unless you know that the management capacity (or capability) of the present management team is available to successfully run the project.
Technology resources - Most investments will need to fit within the existing operations and equipment. If a project does not fit within the technology currently used, the space available or the equipment available then the costs for these need to be included in the overall cost of the project.
The correct resourcing of any project needs to be part of the initial assessment and approval. Inadequately resourced projects will either never be completed or will fail outright. In business you don't get points for starting things, you only get points for finishing things!
Every business needs a business plan and the associated aims or goals and every investment needs to contribute to achieving these goals. The investment programme is an integral part of the business plan and projects outside the limits of the business plan should not be considered.
'Investing for the future' is designed to challenge your concepts and ideas on investment for the future. Various aspects of investment are considered and discussed. The series is:
Part 1: Introduction - (This section)
Part 2: Machinery - Plant & Equipment
Part 3: Materials - Products
Part 4: Methods - Procedures and Processes
Part 5: Manpower - People
Part 6: Measures - Performance
Last edited: 11/03/10
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