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Plan Investments Properly

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Plan Investments Properly. Each business needs to expand and be rentable. But when would you benefit from an investment? The answer to that gives you a tough investment calculation. This allows you to calculate the return on your purchase and get an overview of the expected revenues and costs.

Is the acquisition necessary and useful?

Whether the purchase is actually worthwhile for you depends on numerous factors and conditions. You should consider 2 fundamentally different cases:

  • Necessary (replacement) investments
  • Investments you make to grow your business.
  • Necessary replacement investments

Necessary replacement investments are when you need to buy capital goods that you absolutely need to keep business operations in their current form. Here are some examples:

  • You have to replace a car because of wear and tear, too old or due to an accident.
  • You exchange a computer so that you or your employees can continue to work.
  • You need office furniture for new employees.
  • You need to make these investments to keep the business going. You can then only choose the cheapest offer.

Investments to expand business

  • The situation is a little different if you can decide whether to make the investment or not. In such cases it is mostly an expansion investment. Here are some examples:
  • You buy new production machines to be able to manufacture and sell more products.
  • You want to open a new location in order to open up new markets.
  • Here you have to ask yourself whether you want to make such an output at all and whether it makes sense in principle. To do this, you should describe as specifically as possible which good you want to purchase for which reason and what advantages you expect from it in detail.

Is it really worth buying?

A detailed calculation and evaluation of your purchase takes place when you come to the conclusion that you basically want to make the investment. Depending on the importance of a project and the volume of an investment, different investment procedures come into play. In practice there are 2 basic methods:

  • Static procedure
  • Dynamic procedures

In the case of static methods, only simple comparative calculations are made, such as costs or profit. Only one fiscal year is considered, there is no calculation over several years.

Advantages of the static methods: They are relatively easy to calculate and it takes little time to compile all the necessary data.

Disadvantage: They are comparatively imprecise.

Static investment calculation methods are therefore mainly used for smaller investment projects or in cases where an investment is absolutely necessary and you only have to calculate the most favorable variant for your company, e.g. in the case described when it comes to the procurement of a replacement for a necessary vehicle .

With dynamic procedures , not only a fiscal year is considered. B. to sales, costs and profits, over a period of up to 10 years. From the annual profits (or losses) you can determine whether a project is really worthwhile for you to implement.

Advantage of the dynamic procedure: You can assess much better whether the project is worthwhile for you.

Disadvantage: This entails a considerably greater amount of work. Therefore, these methods are mostly only used for investments that are of great importance for a company or with a large investment volume. In order to determine the strengths and disadvantages of the market and of your goods or proposed offerings, it’s also a smart idea to carry out a comparative review of certain investments.

Financing the investment

Once you have decided to invest, you need to find out how you can obtain the necessary financial resources. You should pay for part of an investment with your own money if possible.

Rule of thumb: 20-30% would be desirable from the point of view of other possible investors, such as the bank. How high the percentage actually turns out, of course, also depends on the amount of money you want to invest.

The remaining capital required for the investment must be obtained from third parties. The first point of contact is usually your house bank. Ask specifically what information the bank needs from you. If you have a second bank account, you should also ask here in order to compare the conditions and choose the cheapest offer.

TIP: Some institutes do not indicate this inexpensive financing option on their own, so you must definitely find out about this yourself.

Use tax advantages

You should not make an investment dependent on whether it is worthwhile from a tax point of view; the overall result is more important. However, it can be worthwhile to keep a few things in mind: DEPRECIATION

Your investment will be written off over a period of time. To do this, the investment amount is divided by the number of years of use. You can use this value as a cost that reduces your profit. In the year of purchase, however, the entire (annual) amount can only be recognized if you make the investment in January. For every month that goes by, you may consider 1/12 of the amount less. As a small company, you can usually claim a special depreciation of 20% of the acquisition value as costs in the year of acquisition.

Investment deduction

If you only want to make your investment in 1 or 2 years, you have the option of claiming a so-called investment deduction amount of up to 40% of the planned investment in advance. To do this, however, you have to describe specifically to the tax office what type of investment you are planning. You can probably talk to your tax lawyer in advance so that you don’t make mistakes here.

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