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Active Business Series - Investing In Your Business - March 2012Document Transcript
Active Practice Updates MARCH 2012 plummerparsons apmar2012-iibInvesting in yourbusinessWhether you are considering fresh investment in an establishedbusiness or initial investment in a new enterprise it is important thatyour investment decisions are thoroughly appraised, timely, and inaccordance with your overall personal and business strategy. Business UPDATENeed for a strategic Clearly there is an even greater need for a planned, strategic approach if your Appraising potentialapproach proposed investment involves expansion or investments diversification such as:Businesses need to keep their investment Investments of any significance should be • Developing a new product or servicestrategies under regular review, regardless subjected to a thorough appraisal, whichof the economic conditions, and assess • Entering a new market ideally would include consideration of thepotential investments not in isolation but • Expanding territorially following:within the context of their overall business • Entering into a joint venture or strategic Financial factorsobjectives. alliance Appraise the financial viability of the projectWhen the current economic downturn began, • Planning a merger or acquisition. by considering, for example:many UK SMEs responded by cutting backon investment - putting off, for example, IT Getting the balance • Availability and cost of funds • Impact on cashflowand other equipment upgrades. But a recentsurvey has revealed that as a result of this right • Return on investmentunderinvestment UK SME’s lost in the region Besides avoiding potentially damaging Alternativesof £8.3 billion in potential new income or underinvestment, it is equally important tonew business opportunities. Before locking onto a particular project, or avoid over investing and thereby placing a specific approach to that project, it can undue stress on your financial resources,There are, of course, many reasons for be worthwhile to consider alternatives, for restricting your investment options furtherinvesting in your business besides replacing example: down the road, or limiting your flexibility toand upgrading systems and equipment, • Not investing capital in the project respond to future changes.but this example does serve to illustrate the but using rental or leasing alternativesimportance of taking a strategic approach to As with many business decisions, investment insteadinvestment and making decisions proactively is a question of balance - and getting the • Investing in the project but taking a lessbased on long term considerations rather balance right depends in large measure on expensive approach - or perhaps eventhan reactively as a short term response to applying appropriate appraisal techniques a more expensive approach - if analysiscurrent economic conditions. during the planning stage. suggests it might be beneficial • Investing in a different project altogether18 Hyde Gardens www.plummer-parsons.co.ukEastbourne BN21 4PT01323 431 200 email@example.com
Investing in your businessTiming investment for a proposed project and to compare it with other possible courses of More sophisticatedConsider, for example: action. financial appraisals• Whether to invest now or at a later date The simplest way to assess an investment is There are more sophisticated appraisal• How long the payback period should to estimate how long it will take to repay it techniques such as Net Present Value and be - a technique known as the Payback Period. Internal Rate of Return that take the time value• To what extent the project can be of money into account by discounting future Thus, for example, if a project requires an implemented in phases cashflow. They allow you to account more investment of £100,000 and is projected toRisks return £20,000 a year, the payback period realistically for factors such as the length is 5 years. If the return is likely to be irregular of time it will take for a project begin toWhere possible, conduct sensitivity and risk the calculations might be a little more providing returns or how a longer investmentanalyses to assess how the investment might complex but the same principles apply. might impact on your cashflow Theserespond to different scenarios such as: calculations can be quite complex and we• Possible delays in implementing or Note that when appraising a potential suggest you contact us if you would like help completing the project investment project it is probably advisable or advice with this.• Changes in the marketplace, especially to initially ignore any sunk costs - money that has already been spent and cannot be It is also important to note that the accuracy competitor activity recovered - or any money that would be and reliability of any investment appraisal• Changes in economic/financial spent anyway. depends upon the accuracy of the data you conditions enter, such as the size and timing of future• Internal changes such as the loss or For smaller businesses, especially those cashflows. Again, this is an area in which acquisition of key employees, customers, that prefer to avoid higher risk long-term you might want to seek our help and advice. or suppliers investments, this is a simple method for• Changes to the regulatory regime identifying projects with relatively short payback periods. However, because it does Tax considerationsNon-financial factors not take account any returns likely to be Any time you invest funds it is important toFinally, relevant non-financial factors should made after the initial investment has been consider the timing from the point of viewalso be included in the appraisal, and where returned it is an appraisal that should not be of both your financial position and yourpossible quantified: looked at in isolation. tax position. We can advise on this. Your investment could qualify for the Annual• The project might, for example result in your being quicker to market with a Impact on profits Investment Allowance if you are planning to invest in certain plant or machinery. product or service, improving employee Another quick method of financial appraisal relations, or adding greater flexibility There are also other tax mitigation options is the Accounting Rate of Return (ARR), to your operation, or it might cause that might be relevant such as a short life which focuses on potential profit rather than disruption that could impact on other asset election. cashflow. Here, you compare the average aspects of your business annual profit you expect to make over the• External factors such as regulatory and life of an investment project with the average Contact us for help and compliance considerations or company reputation might also be relevant amount you will need to invest. Thus, for example, if a project required an average advice investment of £100,000 and was predicted The current economic conditions provide We have considerable experience advising to generate an average annual profit of on the raising of capital and investing in a opportunities for business investment and business, so if you would like help or advice £12,000, the ARR for that project would be development but the risk element of investing with any of these steps, please don’t hesitate 12 per cent. The higher the ARR, the more should also be carefully factored in to the to contact us. attractive the investment. decision making process. We would beConducting a financial Both these methods can also be used to pleased to help you plan your business investments to ensure they are thoroughlyappraisal compare projects to see which are the most attractive, but when doing so it is important appraised and that your tax position is optimised. Call today for help and advice.The principal purpose of a financial to be consistent in the way you make theappraisal is to assess the impact of an calculations so that you are comparing likeinvestment on your cashflow. It enables you with like.in various ways to estimate the return on