To expand your business operations to other markets, to increase your product range or to improve your productivity in order to better respond to market demand. Capital investments, the processes by which a company raises funds to acquire assets, are essential operations to ensure the continuity and growth of both startups and large companies. Understanding the different types of investments and their benefits is key to carrying out these operations.
All companies and startups in the market need financial resources to sustain themselves and scale up within the ecosystem. Capital investments are processes that allow companies to obtain these resources, but in order to carry out these operations successfully, it is essential to know both the financial state of the company and the different strategies that can be developed.
What is a capital investment?
A capital investment is essentially the injection of financial resources into a company in order to promote its expansion or increase its productivity. This type of operation is necessary to ensure the continuity and growth of companies and is generally long-term: it is usually used to acquire assets with a life cycle of at least one year. Depending on the nature of these assets, these investments can be of two types:
- Maintenance. The funds are used to maintain the company’s production capacity, i.e. to cover the costs of deterioration and depreciation of fixed assets. The funds thus allow the company to maintain its current level of sales.
- Expansion. Funds are used to acquire new assets that can drive business growth. Investment therefore allows companies to increase their sales volume.
Capital can be provided both by external investors, such as business angels or investment funds, and by the entrepreneur themselves, either as an individual or as a company, using debt or their own cash. In addition, when a company goes public, it also raises funds by selling its own shares, giving it a large number of investors.
These operations allow companies to improve their products and services and become more competitive in the marketplace, make a financial profit and attract new investors, provided they are well managed. In the short term, however, they can have an impact on the profitability of the company, especially if they involve additional operating expenses, and on its liquidity if the decision is made to invest with the company’s liquid assets. If the investment is made with external players, there is also a dilution of shares, which reduces the ownership and control of the founders and partners over the company.
In order to manage these risks and make a successful capital investment, it is important to have an accurate understanding of the company’s financial position and needs, otherwise potential losses may be incurred. Financial indicators such as cash flow, which reflects a company’s cash inflows and outflows over a specific period of time, or the balance sheet itself, which includes the company’s net worth, assets and liabilities, are very useful in defining the investment strategy.
Types of capital investment
Capital investments are made to meet the specific needs of companies and are used to acquire assets that provide a return. Depending on the purpose of these operations, they can be divided into three types:
- Diversification. They are carried out to extend the product range or to enter new sectors or markets.
- Modernisation. They are used to improve the company’s operations in order to reduce costs and increase efficiency.
- Expansion. They are carried out in response to an increase in demand for the products or services offered to the consumer. Their ultimate aim is to adapt production to the growing market demand in order to ensure the continuity of the company.
In each of these cases, a proper analysis of the financial situation of the company is necessary before undertaking the investment.
The capital investment cycle
In addition to taking into account indicators of the company’s financial health, the cash conversion cycle, i.e. the time it takes for a company to sell a product from the time it acquires the raw materials, should also be considered when making a capital investment.
This cycle is made up of two other cycles, the operating cycle and the capital investment cycle, both of which must be taken into account when monitoring cash flow and deciding when and how much to invest.
- Operational. This covers the normal activities of a company, such as production, selling products or services and collecting payment for these activities.
- Capital. This is the process of acquiring and using the assets that support the company’s productive activity. It shows how many resources a company needs to operate and when it will be able to recover this investment.
The cash conversion cycle is an indicator that allows companies to know how much capital they need to make their investments, whether it comes from external investors or internal funds. Understanding these needs is key not only to successfully completing a capital investment cycle, but also to scaling up in the marketplace and becoming a solid player in the entrepreneurial ecosystem.
