Capital Investment and Business PlanningCapital Investment and Business Planning

Capital Investment and Business Planning

Capital Investment and Business Planning

Business Plan Basics

To start or grow a business requires investments in new equipment, physical assets, buildings, technology, marketing, and such, to launch, expand, or drive more productivity/sales. This often involves spending money upfront, which could come from cash from the existing business, or in most cases, it comes from borrowing/financing. Raising capital often requires a robust business proposal/sales pitch to get partners/investors on board, and to buy in.

What am I going to sell, who is going to buy it, and why will they buy it from me?
  • Can you describe your business model/plan in simple English so that anyone can easily understand, and it would take you less than a minute to explain?
  • What is your business’s unique value proposition to customers?
  • How will you define success both short and long term?
  • What are the financial and capital requirements to get up and running and to meet success milestones?
  • What is the market opportunity? What are sales and growth potential, and time it takes to get there?
  • Is there a robust financial analysis with solid assumptions and scenario/sensitivity analysis to support your investment thesis?
  • How do you plan to take your product to market? What are your sales and operations strategy?
  • What are your risk mitigation milestones? At what point/event when reached will business likely succeed?
  • Why is your business and you likely to succeed? What makes you uniquely qualified to succeed or take this business to success?
How will you make sure the capital investments in your business will succeed?

If you are successful in getting the funds you need to invest in your business, the next big question becomes- how will you ensure that this investment will succeed?

Having the right capital plan is crucial in ensuring the investment you are making will drive profits for a long time and bring in ROI (Return on Investment) you are expecting. For small business owners, spending capital dollars on growth initiatives is very expensive, and can make or break a business.

Many businesses have gone bankrupt by investing money in projects and initiatives that did not pan out as they had hoped for, which resulted in hemorrhaging valuable cash from their businesses. To avoid this costly mistake, business owners must do a deep dive into their decision making, and take advantage of financial tools that are available while putting together a business plan.

capital investments

8 important questions you should be asking to create a smart capital business plan!

  • Are there better alternatives that could be more profitable?
  • What real dollar benefits will this investment drive?
  • What are the upfront costs? Will there be any ongoing costs that you will have to incur to maintain or use this investment?
  • How are you going to fund this investment; and what is the cost of funding it?
  • Are there any scenarios under which this investment could become a stranded asset?
  • Are there any circumstances under which this investment could potentially impact your ongoing cashflows or adversely affect profitability?
  • What is the active life of investment, and will you be able to utilize it for the length of time as planned?
  • What are the possible contingency plans in place if this investment does not perform as expected? Will there be a good resale/offloading option so that it does not become a stranded asset and negatively impact your business?

Doing the right due diligence matters!

Doing the right due diligence behind such big decisions will depend on the accuracy of your assumptions and right kind of analysis done prior to jumping in and making a commitment. Asking the right questions most often than not will not only tell you if you are going down the wrong path, but also force you to think deep and hard and fine tune assumptions you are making regarding the viability of the investment under consideration.

 Important financial metrics such as NPV (Net Present Value), IRR (Internal Rate of Return), and discounted payback of your investment or project could help you make the right decision, reduce uncertainty and unnecessary stress, while allowing you to focus on your core business.

These following assumptions will allow you to avoid pit falls and model out the long-term value creation of your investment: 
  • Upfront investment dollars needed to buy/build/implement
  • Annual benefits/savings generated once this investment goes live
  • Annual cost to run and maintain this investment/asset
  • Depreciation and amortization of asset for tax purposes (to calculate tax savings)
  • Cost of funding and borrowing/opportunity cost 
  • Annual tax implications (tax breaks and local/state/federal incentives if any)
  • Time horizon/operating life of investment (how long will your investment last and provide savings/benefits)
  • End of life/removal/disposal costs if any (cost to dismantle/cleanup, demolish etc)
Diligence matters

Once you have all these assumptions ironed out and listed down all the costs and benefits, a simple NPV/IRR financial model that is readily available online should be able to help you in getting a fairly good picture of payback and ROI.

This simple analysis will show how your investment will perform and impact long-term profitability. If the benefits outweigh the costs, then NPV calculation in your model will be positive, indicating that value is being created long term for your business.  By ensuring that you took all the necessary steps in analyzing the financial viability of your investment will go a long way in adding credibility to your business plan.