Financial Capital investment is the acquisition of money to reach the business goal and the objectives of an organization. The main objectives can be to increase operational capacity, market shares, and maximization of profit and wealth. Organizations that need financial investment to start and run are capital intensive
Financial Capital Investment and the Economy
Investment is a part of aggregate demand. Hence increase in investment will also increase the aggregate demand and economic growth. When an organization is ready to make a capital investment, it shows that the company is confident in its growth and the bright future of the organization because they are raising their production capacity.
How Does Financial Capital Investment Works?
Financial Capital investment company gives an organization the means they need to reach these set milestones. The most common reasons for a business to make a capital investment are:
- To attain resources required for growth and expansion of business. For example, increasing production capacity, production of a new product range, to add value to the existing product.
- To reduce cost or to increase the efficiency or productivity by using modern-day technology or upgrading equipment
- To upgrade the existing resources that have reached end-of-life (EOL). For example, a vehicle used for delivery that is not mileage efficient or a laptop or any other such old dated resource
Factors to Consider Before Doing Capital Investment
Capital investments require large financial resources and in general have long repayment periods. As a result, the financial capital investment company can impacts its finances for many years to come. Due to long project life, evaluation involves several years of future events leading to complexity and ambiguity about the accurateness of assessment
In most cases, the capital investments are irreversible because these investments are in the plant’s machinery, new technology, or upgraded software. Such investments are usually user-specific and if the project does not proceed then it’s really difficult to find such a buyer for our invested assets.
There should be a smart investment plan because underinvestment can create huge complications, such as inefficient operations, increased overhead charges leading to serious economic implications. On the other side, over-investment would result in an increase in the operational cost
Therefore, before the financial capital investment of the company, the financial managers need to analyze the company’s objectives and goals, turn them into milestones then align the capital investments according to the set targets. The impact of these investments needs to be analyzed over the period of time and check the capital budgeting decision technically and economically. Financial managers can face certain difficulties while appraising decisions regarding capital investments which can be
Quantifying of the Benefits and Cost
Quantifying the benefits and cost of the investment could be difficult especially when it involves intangibles like benefits in improvement in quality of life or employment, etc.
- Doubt related to Future
Since the rewards of investment are spread over in the future and are mostly uncertain so the precise value of benefits and cost is difficult to measure
- Complexity in Comparison
Since the benefits and cost of an investment proposal are spread over a period of time, comparing the values on a common basis is not an easy task because of the changes in the value of money over time.
Financial Capital-Intensive Businesses
Capital-intensive businesses require a lot of financial inputs in areas such as facilities, labor, and equipment, along with upgrades and repairs.
Railway companies are infamously capital intensive, requiring regular investments in rolling stock, upgrading lines, and facilities. For example, there was an investment of $2.9 billion for capital improvements in the year 2016 by the Canadian National Railway. In which $1.5 billion was invested in the infrastructure of the rail track, such as the replacement of ties, rail, and other materials for tracking, improvement of the bridge, and upgrading the branch lines. Other investments were associated with fuel efficiency, improving traffic volume, and other services. A small landscaping firm can require a capital investment in machinery, such as trucks, backhoes, or bulldozers. Similarly, a small food chain may require a new mode of transportation or some other manufacturing equipment for a new product.
What is Non-Capital-Intensive Businesses?
Non-capital-intensive businesses are such business that does not require a huge financial investment to maintain their operations. The common examples of non-capital-intensive businesses are software development, consulting, finance, or any sort of business working virtually. Such type of business does not have equipment or facility to maintain thus do not require financial capital investment
Financing Capital Investment
It can be difficult for entrepreneurs to get a capital-intensive industry since it requires a large amount of upfront capital. Even with a well-built business plan, it can still be difficult to finance a capital-intensive business
For example, it will not be difficult to finance a builder for a project of townhouse by a bank, especially in a strong real estate market. But it’s a fact that the same bank will be reluctant to invest with someone opening a restaurant, which is such an industry with a comparatively high failure rate.
So a townhouse development project is more likely to secure a loan with collateral by the bank compared to the restaurant.
So, if you are unable to find monetary debt from a lending establishment and do not have friends or relatives who are wealthy and keen to invest in your business, then it’s most likely that you will need to find angel investors who will be willing to provide monetary support for your business.
Angel Investor
An angel investor is an individual with a high net worth who gives monetary support to small startups or entrepreneurs. These investors take an impartial position in your new venture in exchange for providing financial support. To find the most suitable angel investor you need to find someone who you not only know and trust, but someone who trusts you too. You need to find a person who is well-known with your line of work as they would be useful in providing recommendations and leadership for your new project.
