An investment involves the purchase of capital goods, such as machines for making future profits. Use calculations to evaluate the profitability of investment projects. Find out the risks related to investments. Finance the investments on a case-by-case basis with equity capital and liabilities or both. Think about whether it would be a better idea to lease the equipment than to buy them.
Investments refer to purchasing the capital goods require in your business for the purpose of making future profits. These are usually long-term projects which cause major acquisition and operating costs for your company. The returns from investments are distributed over several years. Major investments are also strategic decisions for your company.
Investments are made when your company wishes to start production or to increase or enhance it. Investments may also aim at protecting the environment, making work easier or complying with regulations by the authorities.
Material investments include the machines, equipment and premises procured for your company. Companies may also make intangible investments, for example investments in research and product development.
In accounting, investments are often defined as acquisition costs of fixed assets. Activate the acquisition costs with your accountant.
An investment project typically includes the following phases:
Identification phase: Define what kinds of investments are needed for reaching your company’s goals.
Searching phase: Aim to find investment targets that are in line with your company’s strategy. Use the targets as the basis for concrete investment proposals, such as acquiring a new printing machine to a printing company to increase production speed.
Information acquisition phase: Find more detailed information on the investment proposals. In particular, think about what expenses and revenue would the investments result in. Also find out the risks related to the investments.
Selection phase: Compare the investment proposals and rank them from the best to the worst based on the information you have collected and the calculations you have made. Select the most suitable investment target for your company from the proposals.
Financing phase: Find out how much money is needed for the investment. Think whether your company needs external funding and where to get the money.
Implementation and monitoring phase: Implement the investment you have planned, which may mean buying the machine you need, for instance. Follow how much revenue you are making from the investment and how much expenses it causes. Compare the revenue and expenses to the budget you have prepared.
When you are assessing the profitability of an investment, for example in connection with buying a machine, you may start by asking the following questions:
- How much will it cost for your company to buy the machine?
- How much revenue is the machine making and how much expenses does it cause annually?
- How much profit do you wish to make from the investment?
- How long will the machine be used and how will the value of money change during the investment project?
- How much revenue or expenditure will the machine generate after it has been decommissioned?
An investment is usually worth pursuing if you assess that the revenue it generates is higher than the expenditure caused by purchasing, using and maintaining the investment.
When determining the profitability of an investment, you can make use of different calculation methods, such as net present value method and profitability ratio.
You may ask your accountant or the business development company in your region for help in assessing the profitability of your investment.
You can finance your company’s investments with either equity capital or liabilities, or both. Select the most suitable form of funding on a case-by-case basis.
Use equity capital for investments, for instance, if
- your company already has a lot of it in its disposal
- you do not want or cannot take a loan
- you can get a subsidy for the investment
- you are willing to give a share of your company to an equity investor.
Use liabilities for investments, for instance, if
- your company’s equity capital is insufficient and you are unable to secure more of it
- taking a loan is less expensive than using equity capital
- you are unwilling to give up your company’s equity holding.
You can apply for public funding for investments through agents such as the ELY Centres. You can also apply for a loan and guarantees from Finnvera and equity investments from Tesi.
For advice in financing investments, contact the business development companies in your region and ELY Centres.