Deciding whether or not to invest
- Alicia Heeger
- 24 May 2023
- Edited 10 Jan 2023
- 6 min
- Managing and growing
Investment is part and parcel of being a business owner: you invest time, effort, and money to fulfill your goals. Investing also comes with its share of risk. If you would like to make an investment, you should assess financial and non-financial factors against each other, as well as factoring in recent price increases in, for example, energy and commodities. This will enable you to make an informed decision to see if the investment is right for you.
Make a financial plan, calculate your payback period, and find out what resources and schemes are available to you. You can then make a decision on this basis.
What is investment?
In business economics, ‘investment’ refers to pooling money into fixed assets: these are business assets which remain in your business for more than one year, including machines, computers, tools, inventory, vehicles, and buildings.
Reasons for investing range from growth, innovation, and sustainability to digitalisation. Alternatively, you might want to stay up to date through regular maintenance, for example with a view to future sale. This article focuses on the financial assessment of whether or not to invest in your business. We will also discuss non-financial aspects which could potentially influence your investment decision, for example impact on your staff, business operations, or sustainability.
Earning back your investment
Before you start investing, you want to find out your payback period, how much profit the investment is likely to generate, and what financial risks are associated with the investment. A financial plan provides you with the insight you need.
The payback period for an investment is relatively easy to calculate. The calculation tells you something about the risk to which you are exposed over time, but not your returns on investment. The payback period refers to the time it takes to earn back an investment. If the revenues are equal to the investment amount, this means the investment is earned back. This is known as the break-even point, and the shorter the period, the more appealing the investment. After the break-even point, you will start earning on your investment.
You invest €5,000 in solar panels. You save €500 a year in energy. In this case, your payback period is: €5,000/€500 = 10 years.
You invest €30,000 in a new production machine. Your additional annual revenue is €15,000. In this case, the payback period is €30,000/€15,000 = 2 years.
If you are in doubt as to whether to invest in solar panels, you may find the offsetting arrangement helpful. It will help you save hundreds of euros on your energy bills.
In a financial plan, you develop the investments into budgets. Calculate an average, positive, and negative scenario to help you identify the impact of your investment. If you are using external funding, you will need to consider funding costs. A financial plan also explains how your revenue evolves in relation to your expenses.
The investment budget describes what you are investing in, and for what amount. In the financial budget, you specify how you will be paying for your investment.
In the operating budget, you show how much revenue you expect to generate after making your investment, and what the attendant expenses will be. It will make clear whether you are expecting to make a profit or incur a loss.
Your liquidity budget specifies your income and expenditures during a specific month or quarter. You will see the impact of the investment on financial flows. There will be additional turnover (revenue) on the asset side. On the expense side, you will see interest charges and repayment.
Price increases and energy crisis
Like other countries, the Netherlands has been affected by price increases (in Dutch) as a result of the global crisis. The impact of high energy prices, higher purchasing costs, and inflation are clearly noticeable in companies’ business operations. People’s purchasing power has been under strain, and the cost price – and, by extension, the sales price – of your product will inevitably increase as a result of the higher costs. You can therefore choose to make an intermediate cost price and sales price calculation more often than you did in the past.
The Dutch government will implement a number of measures for SMEs from the end of 2022, but you can also find ways of saving money yourself. You can save money on higher gas prices or on making your office space more energy-efficient.
The KVK Energy Desk (in Dutch) will provide you with energy-efficiency tips and suggestions for making your business more sustainable. They can also provide you with rules related to energy efficiency from 2023 onward (in Dutch), and how this will affect your business.
Tax schemes and subsidies
Check whether you can take advantage of tax schemes or subsidies for your investment; this will entitle you to a reimbursement of a portion of your investment amount.
If you invest in business assets, you may be eligible for:
Investment allowance for smaller businesses (KIA): use this if you invest a minimum of €2,400 during any financial year and a minimum of €450 per business asset.
Energy-investment credit (EIA): this applies if you buy energy-efficient business assets.
Environmental investment credit (MIA): use this if you are buying environmentally friendly business assets.
Random write-off of environmental investments (Vamil): this allows you to choose yourself how to write off environmentally friendly business assets. You are permitted to combine the MIA and VAMIlL schemes. The Environmental List (Milieulijst, in Dutch) contains a list of business assets classified under the MIA and Vamil. While you can combine KIA and EIA (as well as KIA and MIA), you cannot combine EIA and MIA.
With a subsidy, you will need less funding from your own resources or external sources. Check this list to see if there is a grant available for you. There are also special grants available to make your building, product, and vehicles more sustainable.
Using leasing services
Leasing is where a leasing company pays for the business asset in question. In this case, you are not required to make an investment, but instead pay a monthly fee to use the asset; this ensures that your own funds and lending capacity are available for other purposes – for example, as working capital. Find out what is the best option for you: leasing or buying business assets (in Dutch).
If you decide to invest, you may require external funding. Look at your investment from a financier’s perspective and select (in Dutch) the most appropriate financing type. Even if you hire professional services (in Dutch) to help you with the preparation, a financier may still deny your application. You will then have to find alternative financiers or first build up a buffer and then reapply for funding once you find yourself in a better financial position.
Non-financial factors, too (including the impact of an investment on your staff, business operations, and sustainability) are all factors in deciding whether or not to invest.
Investments in new machines may result in an increase in your employees’ output. The machine can also improve your enjoyment in the workplace and reduce sickness absence rates. You might need fewer people – or more people – to operate any additional machines you might install.
Investments in equipment, inventory, digitalisation of your business process, or a sustainably remodelled commercial space will all contribute to more effective and efficient business operations.
Your investments may also contribute to your purpose to engage in sustainable business (in Dutch). For example, by ‘greening’ your building (in Dutch), you not only reduce your impact on the environment, but will also cut your energy bills. Improving sustainability and actively communicating on sustainability could also boost your business’ ima ge.
You cannot be certain in advance whether your investment will help you achieve your desired goal. Potential risks might include lower production output, a lower sales price, or a longer-than-expected payback period. External factors also constitute a risk; for example, economic trends such as a recession or crisis could potentially have a negative impact, or changing laws and regulations might compel you to make certain changes to your business. Examples: a ban on disposable plastics or mandatory energy-efficiency measures. Trends and developments in your industry, such as unexpected additional competitors, could undermine the investment climate. Any changes in the physical environment of your business, such as building activities or an amendment of the zoning plan, also constitute a risk.
Investing is worth your while if it makes you money and provided that the payback period and interest charges do not cause you any inconvenience. This is particularly true in times of price increases and increasing inflation. A tax reduction or grant will give you back a portion of your investment amount, thereby reducing your funding needs. If non-financial factors also have a positive effect, investing is a good option.
If you are not certain whether financial feasibility is certain and there is no tax deduction or grant available to make things easier for you, your investment is fraught with risk. If the funding costs are high and the non-financial impact is limited, investment makes less sense.
It is ultimately up to you to decide whether you invest and whether you find the risk acceptable. Risk is part and parcel of investment – just as it is part and parcel of doing business.