What is capital investment? Economic efficiency of capital investments. Payback period

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

Business development involves the regular direction of investments in the company: those can be distributed under a variety of items, depending on the priorities determined by the management and financiers of the company. The corresponding investments may have the status of capital. What will be their specificity? How is the performance of these investments measured?

What is capital investment?

Capital investments are funds 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. Thus, a gradual increase in the amount of investments in reconstruction and, accordingly, a decrease in their share in relation to the construction and purchase of fixed assets is considered a normal trend: this is due to greater benefits in maintaining the functionality of these resources than in acquiring or creating new ones. Especially when it comes tolarge enterprises, which are characterized by a one-time purchase of expensive production assets.

Capital investments are funds that, as a rule, are accumulated in targeted corporate funds or in separate bank accounts of the company. The resources by which these funds are formed are most often:

• firm's own revenue;
• investments;
• loans;
• budget receipts.

Methods of investing capital in fixed assets

There are 2 main methods of investing in a company's fixed assets.

First, there is a centralized approach. He assumes that the predominant amount of investment is consistent at the level of key management structures of the enterprise. For example - the board of directors of the company or the parent organization, if the company is a subsidiary of it.

Second, there is a decentralized method of investing in the company's fixed assets. It involves making decisions on investments in funds at the level of local management structures. For example - the service of development and optimization of internal production.

Depending on the scale of the enterprise, the specifics of the current local regulations, 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

Payback periodinvestment in capital funds varies greatly when comparing economic indicators between different enterprises. As a rule, in small businesses it is significantly less than in large ones. Upgrading 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, for about 10 years before the capital is returned in the form of profit from the added value.

Let's consider how the economic efficiency of capital investments can be assessed. 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 under consideration 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 evaluating 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 among 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 capacity of the company or their qualitative change. This means that the company getsthe ability to produce a larger volume of goods or more technologically advanced products. Another question is whether this will be accompanied by cost reduction. The fact is that the reduction of costs does not always depend on the priorities of the company's management in terms of updating fixed assets. Within the framework of this line of activity, such indicators as labor productivity in the company, the level of resource and fuel savings, the efficiency of logistics, and the manufacturability of the available infrastructure are important.

Capital investments are not always directly related to the corresponding indicators. The economic efficiency of capital investments, therefore, must be assessed by adjusting 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 investment model 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 technological projects for the construction and reconstruction of fixed assets, advanced solutions in terms of ready-made non-current assets;
• priority to the economic feasibility of investments;
• learning from other businesses;
• engaging competent experts when making decisions about investing in fixed assets.

Each of the marked criteria has a largemeaning. The task of the company's management is not to neglect those that, based on the specifics of production, may look like secondary ones. If this cannot be avoided, but at the same time competitors can ensure that their activities meet this criterion, then, other things being equal, their business will develop more successfully.

Types of economic efficiency of investments in fixed assets

Experts identify several ways in which you can analyze the results of such a direction of financing as capital investments. The economic efficiency of capital investments, for example, can be of two main types. Which ones? Experts distinguish efficiency: absolute, comparative. Let's study the features of each of them in more detail.

Absolute return on investment

So, there is an absolute economic efficiency of capital investments. Its essence lies in the identification of a figure that shows the ratio of the increase in the volume of net production to the costs of improving fixed assets. In this case, the product is formed through the use of non-current assets, so the investments in question are often taken into account in a rather narrow area - reflecting the production area of the business. It should be noted that investments calculated from the depreciation fund are not taken into account when determining the effectiveness of the investments in question.

One more nuance: the calculation of the economic efficiency of capital investments should be carried out withan amendment to the fact that the monitoring of the functioning of the actual fixed assets is implemented independently. How efficient it is, in turn, may not be directly related to the quality of investment in production. Although, as a rule, both parameters are noticeably correlated 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 the return on assets. Although the positive trends that characterize 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 by management the optimal, most profitable option for the implementation of certain management decisions. 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 available schemes for the implementation of management decisions is characterized by minimal costs, as well as the least need for liquidity. In this case, it may be necessary to search for the optimal combination of these parameters.

Another aspect of the comparative efficiency of investments in fixed assets is a comparison of the results of the corresponding investments and financing of the enterprise's non-productive infrastructure. We noted above that the modernization of funds does not always predetermine the building of a leading business model, since a firm may be inferior to competitors inoptimization of those areas of work that are not directly related to production. The comparative model for evaluating the effectiveness of investments in fixed assets involves a detailed analysis by management of the relevant areas of activity and, if necessary, making decisions aimed at optimizing business processes in such areas.

Coefficient of investment efficiency in fixed assets

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, it may be necessary to apply some normative indicator, which can be guided by when choosing a particular model. Among the most popular of them is the coefficient of economic efficiency of capital investments. It can be set 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 the firm, 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 have an impact on a particular segment. For example, in industrial production, the efficiency ratio of investments in fixed assets is usually lower than that which characterizes construction or, for example, information technology. One of the highest ratios is in retail. This is because this segment isamong the most profitable. The return on investment in it is quite fast, however, to maintain the functionality of the business model, it may be necessary to raise capital in very large volumes.

If we talk about the macroeconomic aspect of the effectiveness of investments in funds, then indicators characterizing investments can be compared with various deflator coefficients and financial indicators. Thus, a scheme is generally accepted in which the effectiveness of local economic indicators is compared with inflation, as well as with the refinancing rate of the Central Bank.

If the annual economic efficiency of capital investments is significantly higher than both indicators, then this may indicate a high quality of management at the enterprise. But it is desirable that the corresponding indicator be higher than inflation. Only in this case, business owners will make sense, from an economic point of view, to develop a business. Of course, an enterprise can operate with a small return on capital investment, and at the same time perform important social tasks. But in this case, he will most likely need state assistance - in the form of budget subsidies or, for example, concessional loans.

Criteria for an objective assessment of the economic efficiency of investments in fixed assets

When evaluating and analyzing the effectiveness of the investments under consideration, the company's management should pay great attention to the objectivity of studying the results of investments in fixed assets. For this, criteria such as:

• analysisthe 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 approximately 2-3 years after the investment has been made);
• taking into account industry specifics of business (in one area, high efficiency of investments in funds is a determining factor in profitability and business development prospects, in another it can 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 policy, marketing, brand promotion.

Thus, an objective assessment of the effectiveness of investments in fixed assets involves 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 economic processes at different enterprises.

Capital investment accounting

Let's consider such an aspect as accounting for capital investments. What is it for?

First of all, the management of the company needs to control how capital investments are spent and distributed. The economic efficiency of capital investments is assessed largely on the basis of the quality of monitoring of operations withthem.

Accounting for the investment 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 corresponding expenses based on their belonging to a particular building or structure, and also disclose business transactions when accounting, which include:

• actually to construction;
• to installation work;
• to the purchase of inventory and equipment;
• to design and survey tasks.

Depending on how the construction of fixed assets is carried out - internally by the organization or on a contract basis - a specific policy is chosen for accounting for such a business financing mechanism as capital investments. The economic efficiency of capital investments in this case will also be evaluated differently. This is primarily due to the fact that business operations that are within the competence of the company itself, as a rule, are much more transparent: their monitoring is more accessible than the corresponding analytics regarding the actions of contractors.