Can you afford an investment? You can check this yourself!

Entrepreneurs, while carrying out their business activity, sometimes have to choose whether it is worth to invest in a new undertaking (or continue the development of the present one) or not. The solution to this issue can be found in our finances because we have to be sure that we can afford a new investment. We cannot begin the development of a new line of products or start a new business activity if our company has little or no money. In such a case, we would have to take a loan in order to fully realize our undertaking, and it would be very unwise to do so. How can we check if we can afford an investment? In order to do this, we do not really need to employ a group of specialists or request an audit report. It is enough to carefully look at our financial situation. It is not a difficult thing to do as long as the management of finances in our company is carried out clearly. There are some well-designed computer applications that make the lives of entrepreneurs easier. Among other things, these programs indicate which departments brought gains and which generated losses. Thanks to them, we are able to constantly monitor and control our expenditures. They also make it possible to make estimates on the possible gains on the level of the company as a whole as well as its particular projects.

Making a decision about taking up a new investment

The decision about taking up a new investment can be a deciding factor determining a company’s existence on the market. It does not matter how long we compete on the market, sooner or later we have to make such a decision. It is a to be or not to be of every company. What is the best way of deciding upon investments? The most important thing is to analyze the pros and cons and to check if we can afford a given undertaking. Though it is said that nothing is impossible to a willing mind, it may not be true in the field of business. Here, in order to begin the realization of any investment or further develop a company and spread its area of interest (or enter a new market), we have to have the right amount of funds. Some of the money might come from external sources like loans, donations, and grants, but some must be the result of a given company’s regular business activity. Before initiating a new investment it is important to construct a proper business plan. It will allow for an objective estimation of whether or not it is worth to take up a given investment; it will also help decide if the company can afford such an undertaking. A business plan is a basic tool that every manager should use on a daily basis. The main part of a business plan that is of interest to us in the context of taking up new investments is the financial analysis of an enterprise and the estimate of costs of investments. If a financial analysis is done properly, we receive an answer to the question if we can afford a given investment.

The analysis of the capabilities of a company

A manager has to be able to evaluate the state and the management of resources of his enterprise. When we mean resources, we talk not only about capital, but also personnel, products, marketing strategy, or the position among competition. Though electronic management of finances in a company facilitates financial analysis, other company resources have to be evaluated by means of different methods. Reports coming from different departments of the same company prove to be very useful in this.

The financial plan of an investment is the core of every good business plan. It should include the results of the analysis of the market and particular products; it should include information on the effects of the pre-planned marketing and personnel strategy as well as the plan and the schedule of a given future investment. It is worth to mention that, in most cases, the financial plan serves as the basic tool for managing a company, regardless of whether we currently deal with its routine activities or some special undertakings.

The creation of a financial plan is more difficult in the cases of new investments because there is a large degree of uncertainty related to the estimates of gains and expenditures. Because of that, when checking if we can afford a given investment, we have to make additional analyses of risks related to the undertaking.

What is a financial plan?

It is difficult to create an unambiguous definition of a financial plan. It is usually brought down to a plan of incomes and costs in relation to specific periods of time. If we carefully monitor the expenditures and incomes of our company, we will get a clear answer to the question if we can afford any investment at all. If we can, the next step is to create a financial analysis of the particular investment to check if the costs of its realization are possible to be covered by the free resources at our company’s disposal.

The plan of the flow of money is a very important element of every financial plan because its careful formulation helps in the reduction of many risks. We have to remember that a proper flow of money, so skillful management of the funds of a company, has a very significant impact on its overall functioning.

Carrying out an investment

If we know that we have sufficient resources to complete a given investment, we may proceed to its realization. It is worth to mention that during our work on a new undertaking – because an investment is an undertaking – we have to carefully and constantly monitor the flow of money in relation to it. Any departures from a previously prepared plan have to be verified immediately because such situations might indicate that our financial plan is imprecise and should be adequately modified. In the monitoring and controlling of current incomes and expenditures related to a given investment a computer application designed for financial management in an enterprise will prove to be very useful. It will surely help us supervise the financial side of our investment – which is probably its most important aspect.

Additionally, it is worth to note that the departures from the plan during the process of realization of a given investment can be a signal of some unexpected circumstances, unwanted situations, and the failures of realization of previous actions. Unfortunately, if that is truly the case, we have to modify not only the financial plan itself, but the preliminary assumptions related to the investment. We have to verify the planned effects and carefully consider if there is a need for some corrections. If the departures are significant, we may even decide to cancel the whole investment. Such a move is necessary when an investment generates costs which are too high, and when the company has problems with maintaining the flow of finances. In order to identify such a disturbing situation on time, it is worth to use an integrated electronic system of financial management. Such a tool should be available to the owner of the enterprise and the people who decide upon the company’s future investments.

When considering the cancellation of an investment, it is wise to ask for the help of a specialist in the field of financial management who has the ability to estimate the risk of continuing the development of an investment under the new, unfavorable circumstances. Our own analysis based on the system of financial management combined with the opinion of a specialist should become the basis for our final decision.

The regular control and monitoring of our financial plan are essential for skillful management during the realization of any investment.

The risk of a new investment

A financial plan combined with the best possible systems of financial management in an enterprise cannot serve as the only factor determining our decisions related to new investments. We also have to adequately assess the risk of potential gains and the chances and threats.

We have to remember that every undertaking entails the risk of not achieving the expected gains. The key aspect here is the break-even point of an investment. Risk assessment related to the invested capital and maintaining the proper flow of finances are two very important aspects that must not be forgotten.

It is imperative that we assess the risk of not achieving the expected gains related to a given investment. At this point, it is worth to check the break-even point of an investment because even a well-planned undertaking can generate income on a smaller scale than expected. The break-even point makes it possible to determine the scale of the income flowing from sales from which the profit for the company equals null. This means that the money invested equals the money gained. Practically speaking, this is the smallest possible income we can accept.

We can also talk about capital risk which is connected to the problems related to the assessment of the proper amount of capital necessary for a given investment. The expenses should include tangible fixed assets, but at the same time they should be reduced by such things as the costs of initiation of an undertaking etc. The disregard of such costs will cause problems in the future, even during the first steps on the way to finalizing a new investment. If an investment entails an unacceptable level of risk, it should not be taken up. Generally speaking, every entrepreneur should consciously include risk estimates and negative scenarios in his investment plans. Thanks to such an approach, he will be positively surprised when all goes well and according to plan.

Summing up, the basis for making any decisions related to a new investment is the recognition of the resources of our company. We can do this on our own if we are equipped with a computer application designed to help in the management of finances. Thanks to such a program, it is easy to construct a financial report about the current activities of our company. If such a report indicates that there are enough free resources, which can be additionally supported by some external capital, we can indeed take up some new, lucrative investment.