Business development requires a regular direction of investment in the company: those can be distributed under various articles depending on the priorities determined by the management and financiers of the company. Corresponding investments may have the status of capital. What will be their specificity? How is the effectiveness of these investments evaluated?
What are capital investments?
Capital investments - this is money invested in the construction, reconstruction or purchase of certain resources that can be attributed to fixed assets or non-current assets. Depending on the stage of business development, the prevailing volume of certain types of investments may vary. So, a gradual increase in the amount of investments in reconstruction and, consequently, a decrease in their share in relation to the construction and purchase of fixed assets is considered a normal trend: this is due to a greater benefit in maintaining the functionality of these resources than in acquiring or creating new ones. Especially when it comes to large enterprises, which are characterized by a one-time purchase of expensive production assets.
Capital investments are funds that, as a rule, are accumulated in trust corporate funds or on separate bank accounts of a company. The resources through which these funds are formed are most often:
- own revenue of the company;
- investments;
- loans
- budget revenues.
Methods of investing capital in fixed assets
There are 2 main methods of investing in fixed assets of the company.
Firstly, there is a centralized approach. He suggests that the predominant volume of investments is consistent at the level of key management structures of the enterprise. For example, the board of directors of a company or the parent organization if the company is a subsidiary of it.
Secondly, there is a decentralized method of investing in fixed assets of a company. It involves making decisions on investments in funds at the level of local management structures. For example, the service for the development and optimization of domestic production.
Depending on the size of the enterprise, the peculiarities of the current local standards, the corporate culture of the company, one or another method of investing corporate capital in fixed assets prevails.
Payback period and economic efficiency of capital investments
The payback period for investments in capital funds varies greatly when comparing business indicators between different enterprises. As a rule, in small businesses it is significantly less than in large ones. Updating the fixed assets of a small factory involves an investment that usually pays off within 3-4 years. A large plant with a similar modernization should work, as a rule, about 10 years before capital is returned in the form of profit from added value.
Consider how the assessment of the economic efficiency of capital investments can be made. Actually, how fast the economic effect of the corresponding investments will be, largely determines the success and competitiveness of the company.
The economic efficiency of the investments in question is generally understood as the ratio between the costs associated with the construction, reconstruction or purchase of fixed assets, and the results in the form of profit. Sometimes the return on investment as the main criterion for assessing the effectiveness of investments in fixed assets is supplemented by other indicators. For example, the dynamics of expanding the presence of the brand, its recognition in the field of consumers. Both trends can be observed even with not the most outstanding economic indicators.
In all cases, the direct result of investing in fixed assets is an increase in the production capacities of the company or their qualitative change. This means that the company gets the opportunity to produce more goods or more advanced products. Another question is whether this will be accompanied by a reduction in costs. The fact is that cost reduction does not always depend on the priorities of the firm's management in terms of updating fixed assets. In the framework of this area of activity, such indicators as labor productivity in a company, level of saving resources, fuel, logistics efficiency, and manufacturability of available infrastructure are important.
Capital investments are not always directly related to the relevant indicators. The economic efficiency of capital investments, therefore, should be evaluated adjusted for the fact that many of the conditions for business growth do not depend on the volume and intensity of the corresponding investments. However, the management of the company should not neglect the desire to build the most balanced model of investing in fixed assets. Consider the main criteria for solving this problem.
Key criteria for ensuring the effectiveness of capital investments
Experts identify the following list of criteria in question:
- effective investment planning;
- search for the most technologically advanced projects for the construction and reconstruction of fixed assets, advanced solutions in terms of finished non-current assets;
- priority of economic feasibility of investments;
- learning from the experience of other businesses;
- attracting competent experts when making decisions about investing in fixed assets.
Each of the noted criteria is of great importance. The task of company management is not to neglect those that may, based on the specifics of production, look secondary. If this cannot be avoided, but at the same time competitors can ensure that their activities meet this criterion, then, ceteris paribus, their business will develop more successfully.
Types of economic efficiency of investments in fixed assets
Experts identify several ways by which you can analyze the results of such a direction of financing as capital investments. The economic efficiency of capital investments, for example, is of 2 main types. Which ones? Experts highlight the effectiveness: absolute, comparative. We study the features of each of them in more detail.
Absolute investment performance
So, there is an absolute economic efficiency of capital investments. Its essence lies in revealing a figure that shows the ratio of an increase in the volume of net production to expenses in the improvement of fixed assets. In this case, the goods are formed through the use of non-current assets, therefore, the investments in question are often taken into account in a rather narrow area - reflecting the production area of the business. It is worth noting that investments calculated from the depreciation fund are not taken into account when determining the effectiveness of the investments in question.
Another nuance: the calculation of the economic efficiency of capital investments should be adjusted for the fact that monitoring the functioning of the fixed assets proper is implemented independently. How effective it is in turn may not be directly related to the quality of investing in production. Although, as a rule, both parameters noticeably correlate with each other.
Thus, it should be borne in mind that the overall economic efficiency of capital investments, if we talk about its absolute variety, is considered separately from capital productivity. Although the positive trends characterizing the first indicator, in general, allow us to assess the second.
Comparative investment performance
There is a comparative efficiency of investment in fixed assets. This parameter is considered in order to determine the optimal, most profitable option for the implementation of certain management decisions by management. For example, related to updating the production base of the company. Comparative indicators of the economic efficiency of capital investments make it possible to identify which of the existing schemes for the implementation of management decisions is characterized by minimal costs, as well as the lowest liquidity requirements. In this case, it may be necessary to search for the optimal combination of these parameters.
Another aspect of the comparative effectiveness of investments in fixed assets is the comparison of the results of the corresponding investments and financing of the non-production infrastructure of the enterprise. We noted above that the modernization of funds does not always predetermine the building of a leading business model, since a company may be inferior to competitors in optimizing those areas of work that are not directly related to production. A comparative model for assessing the effectiveness of investments in fixed assets involves a detailed analysis by management of the relevant areas of activity and adoption, if necessary, of decisions aimed at optimizing business processes in such areas.
Fixed capital investment efficiency ratio
It happens that one scheme is characterized by the ability to save on investments, the other - to achieve a significant reduction in costs. In this case, you may need to apply some normative indicator, which you can focus on when choosing one or another model. Among the most popular of them is the coefficient of economic efficiency of capital investments. It can be installed for a specific enterprise, industry or economy as a whole. Some economists prefer to consider it as a macroeconomic indicator for assessing the development of a company taking into account the state of affairs in the national economy.
The considered coefficient for the industry can be significantly lower or higher than the national one, which is due to the specifics of economic factors that affect one or another segment. For example, in industrial production, the coefficient of efficiency of investments in fixed assets is usually lower than the one that characterizes construction or, for example, information technology. One of the highest ratios is in retail. This is due to the fact that this segment is among the most profitable. The return on investment in it is fairly quick, however, to maintain the functionality of the business model, it may be necessary to attract capital in very large volumes.
If we talk about the macroeconomic aspect of the effectiveness of investments in funds, the indicators characterizing the investments can be compared with various deflator coefficients and financial indicators. Thus, a scheme is considered generally accepted in which the efficiency of local economic indicators is compared with inflation, as well as with the Central Bank refinancing rate .
If the annual economic efficiency of capital investments is significantly higher than both indicators, this may indicate a high quality of management at the enterprise. But it is desirable that the corresponding indicator is higher than inflation. Only in this case will the business owners make sense, from an economic point of view, to develop the business. Of course, an enterprise can operate with a small return on capital investment, and at the same time carry out important social tasks. But in this case, most likely, he will need the help of the state - in the form of budget subsidies or, for example, soft loans.
Criteria for an objective assessment of the economic efficiency of investments in fixed assets
When evaluating and analyzing the effectiveness of the investments in question, the management of the company should pay great attention to the objectivity of studying the results of investments in fixed assets. For this, criteria such as:
- analysis of the effectiveness of investments taking into account the inertia of many business processes (the assessment should not be carried out immediately after making key decisions on the allocation of funds to production, but after a certain time - at large enterprises, the results become apparent only about 2-3 years after the investment) ;
- taking into account the industry specifics of the business (in one sphere, high efficiency of investments in funds is a determining factor in the profitability and prospects of business development, in another it may be a secondary indicator);
- consideration of investments in fixed assets as part of a single model of economic management of the company - along with personnel, financial policies, marketing, brand promotion.
Thus, an objective assessment of the effectiveness of investments in fixed assets involves the consideration of factors that formally may not be directly related to fixed assets. At the same time, some factors will be of decisive importance in some sectors, and others in other segments, due to differences between the dynamics and content of business processes at different enterprises.
Capital investment accounting
Consider such an aspect as accounting for capital investments. What is it for?
First of all, company management needs to control how capital investments are spent and distributed. The economic efficiency of capital investments is evaluated largely on the basis of the quality of monitoring operations with them.
Accounting for the investments in question is carried out using account 8 of accounting. Depending on the specific direction of financing, sub-accounts may also be involved. So, if we are talking about construction, then monetary transactions in this area are recorded on subaccount 3 of account 08. At the same time, it is recommended to classify the relevant expenses on the basis of their belonging to a particular building or structure, and also to disclose accounting transactions that include:
- actually to construction;
- for installation work;
- to the procurement of inventory and equipment;
- to design and survey tasks.
Depending on how the construction of fixed assets is carried out — either by the organization’s internal forces or by contract — a specific accounting policy for such a business financing mechanism as capital investments is chosen. The economic efficiency of capital investments in this case will also be evaluated differently. This is primarily due to the fact that business operations within the competence of the company itself are, as a rule, much more transparent: their monitoring is more accessible than the corresponding analytics regarding the actions of contractors.