The effective functioning of any enterprise depends on the correct investment policy of management. When developing the right course, it is important to confidently operate with the concepts of gross and net investments, to understand how they affect the state of the organization and the level of trust.
In the article, we will consider what gross and net investments are, what are their differences, from what sources they are formed and what needs they are directed to, and we also find out what the calculated values of these indicators signal.
Investment concept
Before talking about concepts such as gross and net investment, it is necessary to determine the very concept of "investment". So, an investment is a monetary or material investment with the aim of making a profit or other benefit. The objects of investment can be both the production and non-production sectors represented by healthcare organizations, education, and culture.
Investment role
The role of investment in the modern economy is difficult to overestimate. They affect all spheres of society through regulation and redistribution of benefits. Consider a simple example: financial investments in a manufacturing enterprise allowed us to open a new workshop. In order to build it and lay the infrastructure, attracted construction organizations, which allowed the latter to earn. The new workshop needs workers, so the number of jobs has increased, the unemployment rate in the country has decreased and the welfare of the population has increased. Due to the opening of the workshop, the volume of production increased, therefore, the profit of the business entity also increased.
Workers in the new workshop were given the opportunity to spend their money on education, culture, or invested in real estate. This example is rather arbitrary, but clearly reflects the importance of investment activity for the country's economy as a whole. Of course, the effectiveness of investments in the manufacturing sector is much easier to evaluate, therefore, we will continue to consider investments in the microeconomic sense, that is, from the point of view of a single production enterprise.
Investment structure
It is customary to distinguish between real and financial investments. Financial investments include the acquisition of securities issued by the state or other business entity. Real investments include investments in fixed and circulating assets, new construction, repair of production assets, acquisition of real estate and land, as well as investments in intangible assets: licenses, patents, research, staff development. Thus, we have smoothly approached gross investment, which is a category of real investment.
Gross investment
When it comes to gross investments, real investments are primarily meant, but financial ones can also be classified as gross if the investor acquires shares of the enterprise upon their initial issue. The funds received from the initial issue of securities go primarily to expand production assets and intangible assets: purchase equipment, rent premises, acquire licenses, etc. Gross investments are investments in fixed assets and working capital.
Composition of gross investments
Gross investment is primarily aimed at maintaining and expanding fixed capital, which includes:
- acquisition, updating and repair of equipment;
- purchase and repair of production facilities;
- capital construction, including housing;
- modernization of the production process.
Gross investment is also a source of increasing working capital. First of all, we are talking about stocks of raw materials and materials that will be needed when expanding production, for example, after the opening of a new workshop.
An important component of gross investment are funds spent on the acquisition of intangible assets:
- licenses and patents;
- inventions and know-how;
- brands and trademarks;
- rights to land;
- mineral rights;
- acquisition of software and software products.
The intangible assets of the enterprise also include human capital, so gross investment can be directed to staff training, medical insurance. Such investments contribute to the growth of the company's prestige in the market and indirectly affect the value of its shares.
Indicator value and calculation
Based on the areas of investment, gross investment can be divided into two groups:
- investments that go into the repair and maintenance of existing production assets,
- investments in capacity expansion.
The first group is depreciation. To accumulate this type of investment create depreciation funds. The volume of the fund is determined using the depreciation coefficient, which is calculated on the basis of the life of a particular type of equipment or building until they are completely worn out. The value of the asset is carried over by the finished product, and after its sale, the pledged amounts are accumulated in the depreciation fund.
The second group is represented by investments aimed at increasing capital, they are called net. These include all types of investments mentioned above, except for depreciation.
The formula for calculating gross investment is as follows:
VI = A + CHI, where
VI - gross investment;
A - depreciation;
Chi is a net investment.
The ratio of the value of gross investments and depreciation volume indicates at what stage of development the business entity is. The growth phase is characterized by an excess of gross investment over depreciation. If the situation is the opposite, this is an indicator of the lack of production potential.
Gross investment in the macroeconomic system can also be calculated on the basis of the gross domestic product, which characterizes the total volume of production of goods and services in the country:
VI = GDP - Rp - Rg - Rche, where
GDP - gross domestic product;
RP - consumer spending;
Rg - government spending;
Rche - net export costs.
Sources of gross investment
The sources of the formation of the total gross investment include:
- own funds of the enterprise in the form of depreciation and investment funds;
- investments of outside investors: financial (acquisition of securities: shares, bonds, shares, etc.) and real investments in tangible and intangible assets;
- loans from banks, leasing companies and microfinance organizations;
- subsidies from the state budget.
Many enterprises try to attract funds from outside investors for their development. This is especially true when implementing investment projects. As a rule, the risks in them are quite large, and the company tries to diversify them by reducing the volume of its own investments and increasing third-party infusions. At the same time, the organization retains full control over the project.
State funds are attracted in the implementation of large projects that are important not only for a particular business entity, but also for the country as a whole. An example of public-private partnership is often infrastructure projects. There are also cases of state investment of rights to land and mineral deposits. Of particular note are situations where entire state enterprises are acting as investments.
Net investment
Net investment is part of gross investment, which is used to expand the production potential of the enterprise and increase capital. Net investment equals the difference between gross investment and depreciation.
The net investment ratio is important in assessing the state of the enterprise. A positive value of the indicator means that the company is in a growth phase, developing and expanding. Zero value indicates a simple reproduction of fixed assets. A negative value indicates that the enterprise does not even have enough funds to update production assets, the organization is in a state of crisis and has a real risk of bankruptcy.
Sources
Sources of net investments are similar to gross and are divided into own funds of the enterprise, net private investments and borrowed funds of banks, leasing and microfinance organizations. The main internal source is the profit from the sale of goods and services and registered capital. In addition, profit from the sale of unnecessary, already depreciated property can be attributed to internal resources. The measure of net investment from domestic sources is an indicator of the stability of the organization. It affects the level of trust in the company of third-party investors and credit organizations.
Importance for the Economy
Net investment refers to real investment, the purpose of which is to expand production and ultimately increase profit. The net present value of investments not only affects the stability of a particular enterprise, but also affects related sectors of the economy in the country: from construction to healthcare, education and culture. Thus, investment activity contributes to the development of the economy of the country as a whole and the growth of well-being of the population.
A decrease in net investment signals the beginning of a recession in the economy and the approaching crisis. The level of investor confidence is declining, and they are transferring investments from real to financial, which generally aggravates the situation. Thus, the work to bring the country out of the crisis rests with the state.
Investments play an important role in ensuring the stable development of both a particular organization and the economy of the country as a whole. Gross investment refers to real investment and is directed to the reproduction and increase of fixed and current assets, as well as intangible assets. Gross investment consists of depreciation and net investment. Net investment is that part of the investment that goes into the expansion and modernization of production, the acquisition of patents and licenses, research and staff development. The volume of net investment is an indicator of the stability of the enterprise and affects the level of trust of external investors and credit organizations.