Tue, Sep

Money, money, money

If only spending it was funny, but it’s a serious business, which is why Phil Thompson, head of BPIF Business, offers this investment business model.

With areas of the economy showing improvement, one area that still seems to be lagging behind is business investment. This has led those who study the markets to speculate that this is one of the reasons behind the lack of improved productivity and high employment levels. What is clear is that companies that get investment right will inevitably capture the most profitable opportunities, clients and markets. Companies that don’t will be left to compete on unfavourable terms and smaller returns.

Every business will have its own pattern of issues and not all capital investment processes will be applicable as a blueprint, but certain principles prevail which can and should be taken on board. Businesses across the sector have of course been taking risk and investing in high capital items, but the risks associated around investment decision making have got more pernicious and the stakes higher and getting it right more tricky.

The availability of technology-led solutions and integrated communications and customer engagement tools provide for lower risk investments, but knowledge and people skills to fully optimise the opportunities that are now open are in short supply. We are seeing a revolution in the convergence and integration of data and technology. This change puts great strain on people resources and the entire planning process. Whilst this list of actions is not definitive it will provide a useful template to build into your own processes and assist emerging managers and maybe yourself.

Use financially defined investment analysis techniques

Appraise ROI and investment criteria mercilessly with different ‘blue’, ‘grey’ and ‘black’ scenario planning and match with better marketing intelligence. A great deal of information can be gained from many sources for free as well as independent and objective support from a trained marketer.

Modelling and investment financial input can also bebought from outside your organisation if you don’t feel you have the full skills available. The more information you have available of course all the better, in terms of building the business case and ensuring that you have quantified the return you would expect from the investment.

Taking care of cash

In today’s environment of rapid change and variability, cash creation and cash management has become critical in forming a capital investment decision. The amount of cash invested needs to be carefully compared to the amount of cash that will be returned, when and in what structure of payback.

The nature of today’s risk means that the future returns have a great variety of possible values and timeframe, so evaluating this fully is fundamental to ensure your cashflow is managed appropriately.

Internal rate of return IRR and discounted cashflow techniques take into account the time value of money and form part of the decision making process.

Consider alternatives to investment

It might sound obvious but have you thought about alternatives to capital investment, such as outsourcing, joint ventures and collaborative agreements, merger or acquisition or indeed a trade sale. It’s a time to evaluate risk and reward in a more creative way. Make it an integral part of your business planning and strategy planning.

Monitor post investment information

Put post investment evaluation into your management feedback process and ensure ownership across your team for achieving the best outcomes. Make sure your expectations are being met across a wide range of criteria such as customer satisfaction and customer value as well as the financial investment criteria. Also monitor the capital investment process you embarked upon and use it as a learning process for the whole business for future actions.

Investment post match analysis

Once the choice has been made and the investment has been approved, using appropriate tools such as ‘plan, do, check, act and control’ should be in place as an important process of analysing what is happening against what was planned. This will then become part of the management and ownership process alongside how the business can constantly look to improve performance and profitability. Better post investment analysis is an essential part of the process.

Post investment questions might cover:

  • What are we achieving compared with what we expected/planned?
  • Has it achieved our goals? Can we further improve?
  • What would we do differently next time?
  • What corrective action if any is required?
  • Has real competitive advantage been gained?

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