Investments: Definition, necessity, examples

How do you approach investments in your company? Do you involve all relevant functions in investment decisions? How does the investment process work? What criteria flow into your investment decisions?

What is an investment?

An investment is the expenditure of financial resources in order to achieve a higher return on financial resources in the medium to long term. The effect of investments on the return can be calculated with an investment calculation, although there is always a certain entrepreneurial risk that the profitability of investments will turn out differently in reality.

What types of investments are there?

Basically, a distinction is made between three types of investment objects. There are investments in tangible assets, investments in intangible assets and investments in financial assets.

Investments in tangible assets

Investments in tangible assets can improve the profitability of the business and enable growth. Typical investment objects are machinery and equipment, vehicles and automation solutions.

Investments in intangible assets

Investments in intangible assets can help secure the future of the business. Intangible assets include research and development of new products, property rights such as patents, utility models and trademark rights.

Investments in financial assets

Investments in financial assets are medium- to long-term capital investments in non-operating debt and equity securities. The intention behind this is that capital that is not needed for the company’s own operations can generate returns outside the business and increase assets. Like investments in tangible or intangible assets, investments in financial assets also involve risks. The expected return should take these risks into account.

Necessary, strategic and classical investments

A further distinction between investments can be made on the basis of the motivation for the investment. There are investments that are necessary, other investments that may make sense for strategic reasons, and investments that have an immediate payoff.

Necessary investments

There are investments that cannot be questioned at all because they are necessary to meet legal requirements. Causes can be fire protection, for example, but also the protection of personal data. In such cases, you can actually do without a classic investment calculation. The investment decision has already been made outside your sphere of influence. All that remains for you to do is to compare and select offers.

Strategic investments

Then there are investment decisions that can be made for strategic reasons. In such cases, too, a timely amortisation of the investment sum is not the main focus of interest.

Example 1: It may be helpful to keep certain articles in the assortment in order to have a complete assortment for customer applications. In this way, one can avoid “driving” customers to competitors so that they can cover their remaining needs there. Even if it may not be profitable in isolation to round off the range in this way, it can pay off for a company on balance.

Often, uneconomic investments are disguised by decision-makers as strategic investments. Always be critical when someone talks about “strategic investment”.

Classic investments

Finally, there are the classical investments for which investment calculations make sense. Investments of this type, which hopefully make up the vast majority of investment projects in your company, should be divided into replacement and expansion investments.

Replacement investments

Replacement investments are cyclically necessary to keep the business going. As a rule, processes and technologies are constantly evolving, so that improvements in the form of efficiency enhancements, quality improvements and further functionalities can also be developed with replacement investments. As criteria for investment quality, these advantages should also be taken into account in addition to pure machine availability. What additional orders can you accept because your future machine can produce with higher precision? What capacity do you gain because your new machine is designed to optimise set-up time and CNC programmes do not have to be programmed on the machine? Replacement investments are relatively easy to calculate. It is important that these possibilities are taken into account in the investment calculation.

The quality of the investment calculation depends largely on how realistic and how complete the assumptions are. Involve the experts working on site in this preliminary work. Involve the sales department as well. Maybe it is not advisable to replace an old machine 1:1. Perhaps the market suggests completely different functionalities.

Investments in expansion

Expansion investments require a much higher degree of assumptions about future conditions and realistic possibilities. Impulses for expansion investments can come from sales and production planning. In these two operational functions, additional capacity needs become visible and tangible. Beyond the need for “more of the same”, impulses for other capabilities and possibilities can also come from marketing and sales, leading to completely different investment ideas. Starting points should be insights from market research and impulses for innovation.

A strategic analysis should be included in such considerations. Do you really have access to promising new customer segments? Is the commissioning realistic?

Operational feasibility should also be solidly examined. Do you have the required qualifications in-house? What skills would you still need to acquire or add to your team?

Investing in the environment

Investments are also opportunities to become more environmentally friendly. Include the selection of materials, consideration of the energy efficiency of plant, machinery and vehicles, and manufacturing processes in your decision criteria for purchases. Environmentally friendly decisions are not only reflected in your environmental management system, but are also recognised by your economic environment.

Public support for investments

Public funding is often available for investments that are in line with development goals. However, the funding opportunities are not easy to overview, and the requirements for funding are often not transparent either. It is a good idea to involve experts who can guide you through the process of preparing, channelling and submitting approvable funding applications.

This is why investments are important for businesses

Companies that invest wisely keep their operational machinery, equipment and commercial real estate competitive. Regular replacement investments contribute to being able to offer services at prices in line with the market.

Investments can increase the attractiveness of jobs and contribute to employee retention. Investments in property, plant and equipment can reduce machine downtime and increase both production output and product quality, as well as reduce waste.

Expansion investments enable growth and associated economies of scale. They can contribute to higher profitability.

Investments in intangible assets help to develop innovative and attractive new products and/or services that are marketable.

In addition, investments can help to conserve natural resources and reduce emissions.

To be able to invest, companies need both access to capital and current income from which to service the principal (interest, repayment). However, not investing often means having to accept higher maintenance and repair costs as well as higher downtimes. On balance, therefore, investments do not usually lead to higher operating expenses. Without investments, all of the aforementioned advantages cannot be tapped.


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