Active Business Series - Investing In Your Business - March 2012

1. Active Practice Updates MARCH 2012
plummerparsons
apmar2012-iib
Investing in your
business
Whether you are considering fresh investment in an established
business or initial investment in a new enterprise it is important that
your investment decisions are thoroughly appraised, timely, and in
accordance with your overall personal and business strategy.
Business UPDATE
Need for a strategic Clearly there is an even greater need for
a planned, strategic approach if your
Appraising potential
approach 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 service
strategies under regular review, regardless subjected to a thorough appraisal, which
of the economic conditions, and assess • Entering a new market ideally would include consideration of the
potential investments not in isolation but • Expanding territorially following:
within the context of their overall business • Entering into a joint venture or strategic Financial factors
objectives. alliance
Appraise the financial viability of the project
When the current economic downturn began, • Planning a merger or acquisition.
by considering, for example:
many UK SMEs responded by cutting back
on investment - putting off, for example, IT Getting the balance • Availability and cost of funds
• Impact on cashflow
and other equipment upgrades. But a recent
survey has revealed that as a result of this
right • Return on investment
underinvestment UK SME’s lost in the region Besides avoiding potentially damaging Alternatives
of £8.3 billion in potential new income or underinvestment, it is equally important to
new 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 further
investing in your business besides replacing example:
down the road, or limiting your flexibility to
and 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 alternatives
importance of taking a strategic approach to As with many business decisions, investment instead
investment and making decisions proactively is a question of balance - and getting the
• Investing in the project but taking a less
based on long term considerations rather balance right depends in large measure on
expensive approach - or perhaps even
than reactively as a short term response to applying appropriate appraisal techniques
a more expensive approach - if analysis
current economic conditions. during the planning stage.
suggests it might be beneficial
• Investing in a different project altogether
18 Hyde Gardens www.plummer-parsons.co.uk
Eastbourne BN21 4PT
01323 431 200 eastbourne@plummer-parsons.co.uk

2. Investing in your business
Timing investment for a proposed project and to
compare it with other possible courses of
More sophisticated
Consider, 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 to
Risks 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 to
Where possible, conduct sensitivity and risk
the calculations might be a little more providing returns or how a longer investment
analyses to assess how the investment might
complex but the same principles apply. might impact on your cashflow These
respond 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 considerations
Non-financial factors
not take account any returns likely to be Any time you invest funds it is important to
Finally, relevant non-financial factors should made after the initial investment has been consider the timing from the point of view
also be included in the appraisal, and where returned it is an appraisal that should not be of both your financial position and your
possible 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 be
Conducting a financial Both these methods can also be used to
pleased to help you plan your business
investments to ensure they are thoroughly
appraisal 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 the
appraisal is to assess the impact of an calculations so that you are comparing like
investment on your cashflow. It enables you with like.
in various ways to estimate the return on