Investments Into Your Business, Vital or Wasteful?

There comes a time in the development of all small businesses that the entrepreneurs must make a very important decision.  Is it wise to put more money into the organization to promote the growth of the business or does it make more sense to retrench and make it a go without any further investments?  The answer to this question is complicated and highly personal.  It must take into account current revenues and costs, the opportunity for new revenues and cost savings and the risk associated with the investment.  According to the Business Development Bank of Canada’s (BDC) January 2016 report titled “Investment Intentions of Canadian Entrepreneurs: An Outlook for 2016” small and medium businesses plan to invest $111 billion in 2016 representing no change from 2015.  However a closer look reveals some regional differences as Ontario and BC are poised to increase investment, while Alberta is looking to drop substantially.  This is definitely a response to the economic climate across the country.

Interestingly, the investments are concentrated, as 75% of the investment value is coming from only 10% of the companies.  Of the companies choosing not to invest in 2016, they site a lack of confidence in the economy as the major reason.  Of the companies that do plan to invest this year 57% of the funds are planned to go into hard infrastructure assets such as land, buildings and renovations. A clear sign that growth in their business is a driving force.  Other major planned investments include approximately 20% for machinery, equipment and vehicles while 9% is planned for workforce training and recruitment, more clear examples of the business community’s plans for growth.  In fact of the businesses that plan to invest this year, 48% of them feel their revenues will grow while only 22% of the firms not planning to invest feel the same way. Also for the company’s planning to invest, 77% of them say they are doing so in order to achieve growth objectives.

The second largest motivation for companies to invest this year is a desire to increase productivity and efficiency. A major chunk of the remaining investment dollars are being set aside for business improvement initiatives such as computer hardware and software purchases, website and e-commerce developments and investments into innovation and research & development.  Combined these investments account for a little more than 10% of the total dollars set aside for 2016.

So what do the companies planning to invest look like?  According to the BDC report a profile of the typical investing organization is an older company having been in business for more than 35 years with an outlook towards revenue growth.  They have 20 or more employees with business activity inside and outside of Canada and have investment aspirations abroad.  They are also more likely to be in the manufacturing or resource sectors of the economy.

So what does all this information mean to you, the small business owner?  For starters it means that a large number of your peers are looking to invest in their business.  It is a good bet that these investments will allow them to compete better in their competitive landscape.  Those companies that have not made any investment plans could find themselves falling behind their peers.  That would not be a good situation to be in.

What are the next steps?  It all starts with having a solid business plan complete with one, three and five year outlooks.  This plan should review prospects for revenue growth along with risks to current revenue.  Profitability is also a primary concern, so the plan should take a close look at opportunities to gain efficiency in the current operations. Pro forma financial analyses can determine if making investments in infrastructure or productivity makes sense by leaving the organization in a better financial position. Lastly cost/benefit analyses should be completed on any prospective investment to ensure that the costs are manageable and the benefits are realistic.

In the end it has been said that a business needs to grow otherwise it will wither.  Creating a solid investment plan is something that all businesses will need to engage in at some point in time to ensure the long term viability of that business.