Should you invest in that expansion project on your business?
An important step in deciding on whether to make a major purchase or take on a major project under your existing business is to really sit down and think about what you are trying to accomplish. What are the benefits that will flow from your project? At this point, just focus on the benefits. These could be increased business revenue—what we economists term profit maximisation; reduction in costs (or rather costs minimisation); and other less tangible benefits. Once you get a handle on those, you can look at the costs, and decide whether (or how) you can afford to carry out your plan.
Considering revenues and costs: In most cases, the types of benefits you will be looking for are things that increase your revenues, or decrease your costs. For example, let us say Thona Investments is thinking of buying a truck, so their retail store can make deliveries. Will this pull in customers that do not already buy from them, or increase the level of purchases of their existing customers? If so, the purchase might be a good idea. However, it can also be a good idea if Thona Investments has been offering deliveries for some time, but the truck they currently have has been costing them a fortune in repairs and maintenance and they think of finding a more reliable vehicle with better fuel mileage. In this case, Thona is not looking for a revenue increase—their goal is to lower their vehicle expenses.
Most business owners (and their financial advisors) are happiest when the benefit of a project is a revenue increase or an expense decrease, because these kind of gains can be quantified—the changes can be estimated in terms of kwachas brought in or saved. Thus, you can do a formal financial analysis of the project that measures costs against benefits. Moreover, after the project is completed, you’ll be able to measure the results in terms of kwachas.
Consider less-tangible benefits: However, there are other kinds of benefits that can flow from your project, and that can also help your business, perhaps indirectly. For example, if Thona Investments decides to redesign their logo, they can gain a more professional image, which may, in time, lead to better-heeled customers and more revenue. Carrying certain lines of products can strengthen your image with particular ethnic or religious groups, even if the products themselves are not big moneymakers. For example selling clothing carrying pictures of Mecca in Muslim-dominated areas may boost their sales. Depending on your business, these unquantifiable gains may be quite important to you, even if the net benefit is hard to measure or predict. Nevertheless, when you are faced with a choice between two competing projects, it is usually best to choose the one that has the greatest quantifiable benefits.
Sometimes a project will be needed to enable you to keep the level of business you already have. For example, a Kusalala Hair Salon may need to replace furniture and redecorate, periodically, if it wants to keep up a fashionable image. Repairs and replacements of all types fall into this category. Benefits of these kinds of projects can sometimes be quantified by estimating the way your revenues would drop off over time if you did not make the change.
And finally, some projects are simply mandated by law (such as cleanup of certain environmental hazards, or upgrades to comply with building codes). Although there may be no incremental financial payoff, the project is needed to keep you in business.
Keep in mind that the question of the business benefits you can achieve and the detailed requirements of your intended purchase or project can change, as you move on to evaluate the costs. If the features you want are too expensive, you may have to settle for less. But always remember, it is the objective you set to achieve by putting in the major project that should determine the means and their objective alternatives.
Blessed weekend to you and yours!
