Investment costs in business planning
Investment costs – the concept well, very “extensible.” As a rule, planned expenses are always an order of magnitude less than those actually needed. So how much to lay on the miscalculations?
At the beginning of the implementation of the simplest investment project, it is necessary to clearly define … “how much money is needed.” Why? Because if you have not taken into account something in the investment plan, then, perhaps, already at the project implementation stage, at some point in time you will be able to feel their shortage, and there will be no place to take them. As a rule, this situation can reduce all previous efforts “to naught”: the project at best will not be implemented, at worst … well, there are many options …
What is investment costs? There are many definitions. One of them sounds like this:
Investment costs are the total costs that are associated with the implementation of business projects. Their types and composition varies depending on the specific project.
In other words, it is “how much money is needed” so that the planned investment project at a certain period of time will reach the operating profit. After all, before that there were losses that, in addition to “total expenses”, were covered by so-called working capital or from other sources.
When expectations are not met
From my many years of experience, I can say that at the beginning of the study of an investment project, it is far from always possible to accurately calculate them. Be sure, there are additional articles that were not originally taken into account. At the same time, it happens that the planned investment costs and real percent differ by 50-70, or even more. Not as with the Olympics in Sochi, but also large deviations. This happens for various reasons. As a rule, during the initial development of an investment project, there are no design estimates, no selected equipment, or a clear understanding of how much money is needed for working capital.
Equipment for the production of products from HDPE (low pressure polyethylene) costs 7 million rubles. For a 24-hour line operation, polyethylene chips need 2 cars and a small trolley. So what are the investment costs of the project? Obviously not 7 million rubles. and not even 15 million. Feel the difference? That’s it.
Suppose a great construction is planned. Many, many square meters … How do they consider the investment expenditures enlarged? Suppose a square meter builds 40 or 50 thousand rubles. and multiply it all by quadrature. Opanki and went to investment costs. At the same time, few people suspect that substantial means are necessary to connect communications.
Need a light? You are welcome! For the connection of 1 kW. pay 2-3 thousand to start. And then … Then order the technical conditions for the project and pay for them. Then order a project and pay for it. Then put a transformer, etc. If you need 500 kW electric power, then you will have to pay 1-1.5 million commercial for the connection. So, modestly, just for permission to connect to the network …
Similarly, do the same with gas, water, sewage … Yes, and the Internet with the phone. Opanki, plus ten million unplanned expenses. Where to get the missing, unplanned money? From the pocket? And if it is already empty by this time? How to be? The answer is obvious – to work out the investment project more carefully. There is no other answer.
Will there be mistakes and miscalculations? And where are they not? Another thing is that they do not lead to sad situations. Therefore, by hook or by crook, investment costs (for safety net) should be overestimated by at least 10 – 15%, and even better by 20%. As the saying goes: “there is not much money”.
How to structure investment costs
There is no single rule, but reasoning logically, you can build a structure that looks like this:
As a rule, “cash” is intended to pay for raw materials, materials, current payments. Payment of wages and taxes before the start of operation of the enterprise. However, the structure may vary slightly.
What are the investment costs?
First of all, investment costs affect the so-called “integral indicators” of an investment project. I talk about them in detail in this article, and in this one I’ll draw attention to one of them – this is the payback period of an investment project.
Secondly, investment costs affect the so-called cash flow. They increase it due to the so-called. “Depreciation charges”, as depreciation (or depreciation charges) of the acquired property under the project are included in the cost of production / services.
Based on the above, it is obvious that the more thoroughly the entrepreneur (or the developer of the investment project) approaches the prediction of investment costs, the more the project has a better chance of being successfully implemented.