Investment budget: concept, structure, financing and costs

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

All projects implemented by a commercial enterprise are divided into current and investment projects. Both types 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 make a profit only in the long term. Provided that the project turns out to be successful and will allow not only to compensate for the initial costs, but also become a source of additional profit.

Concept

Every company that is engaged in commercial activities can develop new projects that require investment. To control the flow of funds allocated for the development of a new project, a separate budget is created. It is called investment. Let's find out more about what's behind it.economic term.

The investment budget contains information on the distribution of financial resources for established periods, which are allocated by management or third-party investors for the implementation of the project. Agree, it is not necessary to explain in detail why cash control is needed. Just imagine what will happen if you neglect this information.

The investment budget includes a payment schedule for the start-up costs required to set up a new business. This document shows in detail the distribution of capital investments, as well as some other expenses. These are licensing, launch advertising, certification, execution of other permits, etc. Regardless of the field of activity of the company, these costs cannot be avoided.

Features

The investment budget is a separate category. This allows you to effectively develop new projects. Just imagine that the company does not have a division into the current and investment part of the budget. This is extremely inconvenient, as it leads to constant confusion, not allowing a clear understanding of the amount of funds allocated for the development of the project.

Practice proves that investment projects require separate budgets and no less close attention than the current activities of the enterprise. If you do not allocate funds for new projects from the total costs, it will be extremely difficult not only to control them, but also to plan them.

You must also understand that investment costs may increase, but at the same time theyincredibly difficult to keep track of 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 the current profit. If you evaluate investment costs as they occur, it will be extremely difficult to make adjustments. This is an unacceptable waste for the enterprise. That is why the financial and investment budget is singled out in a separate category. This is fully justified from the standpoint of saving and planning funds.

Costs

The investment budget must certainly include all the costs that are carried out in order to develop the project. However, in this case, any expenses are made with the aim of acquiring financial or physical capital, which will further generate profit. That is, as a rule, any costs in investment activities are not a waste of funds, but investments.

For example, in the case of opening a classic business, the costs will certainly consist of all types of costs that are required to organize activities. This can be renting a room, purchasing goods, hiring staff, etc.

As you understand, the investment cost budget should contain all types of costs that will be required to start the project. However, in the long run, they will bring profit to the entrepreneur.

Cash flow

You need to understand that investment activity is not always a cost. For example, the sale of assets can be profitable. That's why the budgetThe investment project should include not only costs, but also income. The source of income may be interest on long-term financial investments, including participation in the capital of third-party firms. This category also includes the return of financial investments, etc.

Structure

The investment budget in the form of capital investments has a relatively simple structure and consists of two parts. What exactly are we talking about? These are the spending budget and the funding budget. These are the two main categories that, in combination, form the costs of the enterprise for the development of a new project.

Funding

Budget funds for an investment project do not arise by themselves. The enterprise, as a rule, has to look for sources that will allow the development of a new project.

Let's talk about them in more detail.

First of all, you should know that all funding sources fall into two broad categories. Equity and borrowings.

The following types belong to own funds.

• Retained earnings.
• Depreciation charges.
• Shareholder funding. This can be share premium, as well as contributions from the founders.

Landed funds include more potential funding sources. Let's list them.

Commercial sources include the following.

• Bank loans.
• Loansindividuals and legal entities.
• Leasing.

Also borrowed funds can be public. These include:

• Subsidy.
• Deferral of tax payments.
• Planning.

The investment finance budget requires careful planning. Without this, it is impossible to effectively manage the funds that are aimed at the development of the project.

Investment budgets for development projects are made up of temporary working groups, which 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.

The total investment is planned by the IEE Budgeting Economist. The procurement budget for office furniture, as well as technical devices, is taken as the basis. 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 turn into some part of the company's assets.

Formation

Budgets are formed in several stages. This is a rather difficult process that is not carried out quickly.

• First of all, budgeting for individual projects. This is important to ensure effective fund management.
• Next, generalization is carried out within the framework of the long-term investment budget.
• Projects are scheduled by time.
• Carry out the detailing of each project inwithin the current reporting period.

Agreement 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.

During the negotiation 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 funding for projects is usually limited, respectively, the company is not able to implement everything at once.

Preliminary approval

This procedure is carried out at the level of the general and executive directors. The heads of the financial directorate also take part. If the enterprise has the position of development director, he also takes part in the stage of agreeing and approving the investment budget.

Before the pre-approval start period, it is recommended to plan the current activities of the enterprise. This allows the most specific assessment of the amount of funding that can be directed to investments. In addition, it is important to know what part of the project can be financed with its own funds, as well as how much borrowed capital will have to be attracted. Only careful calculations allow effective activity.

This is the basic information that directly relates to investmentbudgets. It should be understood that each company can have different types of investment projects. For example, typical and unique. Some companies apply their own criteria when classifying projects. For example, a development project is implemented at least once during the year, it is considered typical.

Even if the company is implementing only one project, you need to collect as much information about it as possible, clearly realizing the launch goals and planned results, and also draw up an investment budget. After all, no project can be implemented without funding. Moreover, much depends on the amount of money that the company is able to allocate. This directly affects the speed of implementation of the investment project. The more funding the company allocates, the faster the approved project can be implemented.