All projects implemented by a commercial enterprise are divided into current and investment. Both species have fundamental differences. On current projects, the company makes a profit. Investment activity is aimed at the development of new projects and allows you to profit exclusively in the long term. Provided that the project will be successful and will not only offset the initial costs, but will also become a source of additional profit.
The concept
Each company that is engaged in commercial activities can develop new projects that require investment. To monitor the movement of funds aimed at the development of a new project, create a separate budget. It is called investment. Let's find out in more detail what is hidden behind this economic term.
The investment budget contains information on the distribution of financial resources for the established periods, which are allocated by management or third-party investors for the implementation of the project. Agree, it’s not worth explaining in detail why money control is needed. Just imagine what will happen if you neglect this information.
The investment budget includes a schedule for the payment of the initial costs that are required to organize a new business. This document details the distribution of investment, as well as some other expenses. This is licensing, start-up advertising, certification, execution of other permits, etc. Regardless of the scope of the company, these costs can not be avoided.
Features
The investment budget is allocated in a separate category. This allows you to effectively develop new projects. Just imagine that the company has no separation between the current and investment part of the budget. This is extremely inconvenient, as it leads to constant confusion, not allowing you to clearly understand the amount of money spent on the development of the project.
Practice proves that investment projects require separate budgets and no less careful attention than the current activities of the enterprise. If you don’t allocate funds for new projects from the total costs, it will be extremely difficult not only to control them, but also to plan.
You must also understand that investment costs can increase, but at the same time they are incredibly difficult to track in the overall budget. This is due to the fact that such expenses are not directly reflected in the category of current expenses. Also, they do not affect current profit. If you evaluate the investment costs upon completion, it will be extremely difficult to make adjustments. This is an unacceptable squandering for the enterprise. That is why the financial and investment budget is allocated in a separate category. This is fully justified from the perspective of cost savings and planning.
Expenses
The investment budget must certainly include all costs that are incurred in order to develop the project. However, in this case, any expenses are incurred in order to acquire financial or physical capital, which will subsequently be profitable. That is, as a rule, any costs in investing are not a waste of money, but investments.
For example, in the case of the opening of a classic business, the costs will certainly consist of all types of costs that are required to organize activities. This may be the rental of premises, the purchase of goods, hiring personnel, etc.
As you understand, the budget of investment costs should contain all kinds of costs that will be required to launch the project. However, in the long run, they will bring profit to the entrepreneur.
Cash inflow
You need to understand that investment activity is not always a cost. For example, selling assets can be profitable. That is why the budget of the investment project should include not only costs, but also revenues. The source of profit may be interest from long-term financial investments, including participation in the capital of third-party firms. This category also includes the return on financial investments, etc.
Structure
The budget for investment costs in the form of capital investments has a relatively simple structure and consists of two parts. What exactly is it about? This is a spending budget and a financing budget. These are two main categories, which in combination form the enterprise’s costs of developing a new project.
Financing
The budget funds for the investment project do not arise on their own. An enterprise, as a rule, has to look for sources that will allow it to develop a new project.
Let's talk about them in more detail.
First of all, you should know that all sources of financing are divided into two large categories. Own funds and loans.
Own funds include the following types.
- Retained earnings.
- Depreciation deductions.
- Shareholder financing. This may be share premium, as well as contributions from the founders.
Borrowed funds include a larger number of potential sources of financing. Let's list them.
Commercial sources include the following.
- Bank loans.
- Loans to individuals and legal entities.
- Leasing.
Also, borrowed funds may be public. These include:
- Subsidy.
- Deferral of tax payments.
- Planning.
An investment finance budget requires careful planning. Without this, it is impossible to effectively manage funds that are aimed at developing the project.
The investment budgets of development projects are temporary working groups that are created not only for planning, but also for subsequent implementation. Without fail, among other specialists, an investment economist is involved. If a company develops several projects, several such economists can work in it at once.
General investments are planned by the economist on budgeting PEO. The basis is the procurement budget for office furniture, as well as technical devices. That is, in this case we are talking about investments in the purchase of furniture and office equipment, which are not written off as expenses, but are turned into a part of the company's assets.
Formation
Budgets are formed in several stages. This is a rather complicated process that is not carried out quickly.
- First of all, they make up the budgets of individual projects. This is important to ensure effective asset management.
- Next, they generalize within the framework of a long-term investment budget.
- Projects are planned on time.
- They carry out the detailing of each project within the framework of the current reporting period.
Alignment and adjustment
This is an important step in the whole process. These actions are carried out by the heads of the financial directorate, as well as the executive director and the head of the temporary group that carried out the development.
At the approval stage, preliminary decisions are made as to which projects will be included in the final budgets and which will be postponed to a later period or implemented at a slower pace than originally planned. This is due to the fact that financing of projects is usually limited, respectively, the company does not have the ability to implement all at once.
Preliminary approval
This procedure is carried out at the level of general and executive directors. Also involved are the heads of the financial department. If the company has a position of development director, he also takes part in the stage of approval and approval of the investment budget.
By the period of the beginning of the preliminary approval, it is recommended to plan the current activities of the enterprise. This allows you to most specifically assess the amount of financing that can be directed to investments. In addition, it is important to know how much of the project will be able to be financed with our own funds, and also how much to borrow. Only careful calculations allow us to carry out efficient activities.
This is the basic information that directly relates to investment budgets. You need to understand that each company may have different types of investment projects. For example, typical and unique. Some companies apply their own criteria, classifying projects. For example, a development project is implemented at least once during the year, it is considered typical.
Even if an enterprise carries out only one project, it is necessary to collect as much information as possible about it, clearly realizing the goals of the launch and planned results, as well as draw up an investment budget. Indeed, without financing, not a single project can be implemented. Moreover, a lot depends on the amount of money that the company is able to allocate. This directly affects the speed of the investment project. The more funding a company provides, the more quickly it will be possible to implement the approved project.