Analysis of investment efficiency is an indispensable stage in evaluating any project that is potentially attractive for investing substantial funds in it. An objective assessment minimizes the risks associated with a poor choice of investment direction. And for this it is important to pay attention to various factors that somehow affect the efficiency of the enterprise.
Inflation is the main enemy of the investor
Analysis of the economic efficiency of investments always begins with the identification of the impact of inflation. This phenomenon affects the economy at both the micro and macro levels. The term refers to an increase over time in the value of goods and services.
Inflation primarily affects the purchasing power of money, lowering it. In the future, this affects the discount rate, profitability - the values fall. At the macroeconomic level, it is recommended in a situation of high probability of inflation to choose projects in which funds must be poured not once at the beginning, but for a long time in small “portions”. This technique allows you to minimize losses associated with rising prices, as well as reduce the gap between results and expenses. Strategic planning and analysis of investment performance show that loss-making with this approach to choosing an investment subject becomes less likely, since such a high sensitivity to price swings is excluded.
Inflation and the subject of investment
The analysis of the economic efficiency of investments involves an assessment of inflation for the current state of the economy and forecasts for the near and distant future, since it is this phenomenon that strongly influences decision-making. Investments are made in entrepreneurship today, that is, nominal and real values will coincide, but income can only be expected in the future, when the value of the current investment is reduced and money depreciates, and it is difficult to predict in advance how much. Inflation increases risks and complicates the choice of a project for investing money in it.
As a result, the project, into which investments were poured in at the initial stage, over time needs additional sources of income. In addition, the loan increases the interest rate, there is a change in the discount rate. All this leads to a complication of the issue of bonds, increasing the diversification of the investment portfolio.
And what to choose?
It follows that with high inflation, investment analysis, investment performance assessment are aimed at choosing the most profitable enterprise, that is, one for which profitability indicators will exceed inflation growth. Otherwise, investing in entrepreneurship turns into a risky and unprofitable process.
Performance Evaluation: Actual Problem
Analysis of the effectiveness of real and financial investments has been a task on which the attention of economists and business leaders at various levels has been focused for more than a decade. The approaches developed in recent years have made it possible to identify several methods of analysis, the selection of optimal projects, and also to formulate recommendations, following which you can make effective financial investments.
Well-known methods today are divided into:
- foreign;
- domestic.
The choice in favor of a specific option is carried out, starting from the individual characteristics of the subject and the project, potentially attractive for investment.The economic situation in the country as a whole and in the industry in particular also influences.
Important Nuances
Russian methods for analyzing investment performance have long developed under centralized control, which has greatly affected them. For this reason, they are different from foreign options that more accurately and in detail examine market relations.
Another caveat is the importance of using computer technology. Today, this technique is one of the most powerful tools due to which the analysis of the effectiveness of financial investments becomes accurate and efficient.
Analysis methodologies
There are three methods that allow you to conduct high-quality analysis of the effectiveness of investments in fixed assets:
- UNIDO;
- reduced costs;
- integration and net income.
The second of the above is no longer applicable, as it is considered insufficiently accurate for the conditions of the economy today. The latter is also assessed as not the most optimal option, since there are no correct standards on which to base calculations. While there is no scientific justification of the available methodological developments, and this significantly complicates the implementation of measures to identify real performance indicators.
Methodological base
The analysis of the effectiveness of real investments is carried out in accordance with the Methodological Recommendations and the Standard Methodology developed in 1988. Since these documents were practically theoretically worked out deeply, they are relevant in our days.
Another important document on the basis of which the analysis of investment efficiency is carried out is the “Comprehensive Performance Assessment”. The methodological manual is good in that it has worked out the technical, scientific, economic aspects of analysis. There is also a weakness - a minimum of attention to marketing, a small amount of information about financial analysis.
UNIDO and some other organizations involved in investing at the international level, in their methodological recommendations, reflect the world experience gained over many decades, as well as the established practice of calculations used at the stage of selecting a project worthy to be invested in. The UN issued an official document dedicated to this survey, in which all of the above was fully reflected. This methodological manual is nowadays used by leading economists of all countries of the world.
Investments: allocation of categories
The classification of investments used in the analysis of their effectiveness is necessary for the subsequent identification of effective strategies and preparation for investment. It is customary to talk about:
- Forced when investing becomes a guarantee of compliance with laws (safety, labor protection, environment, other aspects).
- Increasing efficiency, that is, aimed at creating such conditions in which the company can work with minimal expenses. To do this, move production workshops to regions with the most favorable conditions, change equipment and teach staff to work more efficiently.
- Aimed at expansion, that is, increasing the possibility of releasing goods, using existing production capacities for this.
- Aimed at creating a new one. This investment allows you to create enterprises, produce goods that have not previously been produced, provide services of previously unknown types, and also try to enter the market with goods known to consumers, but previously unknown to the company in which they invest.
- Aimed at innovation, research.
Performance Assessment Methods
Investment performance analysis includes:
- assessment of the benefits of various options for the implementation of the project;
- comparative analysis of information;
- selection of the optimal solution.
There are many methods for evaluating effectiveness. The most common:
- compounding;
- payback;
- accounting rate of return;
- discounting.
Actively use methods:
- cost-effectiveness;
- fixed income;
- cost-benefit.
Cost Effectiveness
An analysis of investment performance using this method suggests that opportunities are limited by a certain known framework. At the same time, profits can grow unlimitedly, however, an increase in the types of services is possible. The basic condition for applying this analysis methodology is the impossibility of implementing the plan conceived by traditional means. The analysis is performed according to one of the logics:
- equal opportunity;
- equal budgets.
The first option takes into account that there are several projects, there is competition between it, each of them offers a system that covers the demand for the target product. Quality, volumes are equal. Equal budgets, in turn, imply the introduction of new systems in assessing annual costs and maintaining the level stable throughout the year. To do this, calculate the cost of the product and study how large the potential additional income is, whether it justifies the costs associated with the implementation of the new system.
Investment projects: what to look for?
Each project has its own unique indicator - the economic life. In addition, different enterprises differ in the period of development of funds, the terms of construction. From these values depends the duration of the periods of costs, revenue streams. To characterize the project, a temporary stream of net income for a given period is allocated.
It is correct to single out time intervals during which costs are greater than incomes, as well as periods when incomes prevail - the basic task for conducting a correct analysis. To determine the time intervals, it is important to assess how much money for investment was received on credit, in what terms these funds must be returned and in what order the return must be made, what interest will have to be paid additionally.
The analysis performed in conditions when the initial cost of the loan, interest, and financial calculations are known is a method of building up. Calculation of investment efficiency is called compounding.
Principles of analysis
Measures are taken to calculate the effectiveness of investing in an interested project, based on the following rules:
- the analysis is carried out in the current time (or by the beginning of the year for which the calculation is carried out);
- based on the time value of money;
- a constant financial inflow is formed, creating capital in the future;
- the effectiveness is positive, if the invested amounts are fully returned to the investor, he received additional income.
Efficiency: what is it?
It is customary to talk about two types:
- comparative;
- absolute.
In the first case, the performance of different projects is compared in terms of not only investment, but also innovation. The best parameters allow you to determine the most profitable option.
With absolute effectiveness, they talk about choosing a project and making a positive or negative decision regarding it. That is, there is no alternative option, against the background of which one can speak about the concrete, is it better or worse.
Comparative efficiency is not the best option for deciding in favor of the project when two different enterprises show the same profitability parameters in the analysis.
Analysis criteria
Fundamental criteria that deserve maximum attention:
- project profit;
- profitability, defined as the difference between the invested amount and profit, as well as the difference between the profit received, reflecting the growth rate;
- inflationary effect, reflecting the purchasing power of cash.
The more inflation grows, the less money costs.Calculations always evaluate the expected inflation rate, since only by balancing this factor can one achieve stable profitability and sufficient risk coverage.
Finally, the analysis calculates the value of the investment. To do this, determine the interest rate of capital, the most reliable assuming the real. For the calculation using the following formula:
R = N - I
R denotes the real rate, the second parameter is the nominal rate, and the last value reflects the rate of inflation growth. It is customary to take percentages of indicators characteristic of the studied time period.
Financial methods
Using the right methods is the most accurate way to determine how effective an investment will be. Common methods are the most accurate, well-developed. As a rule, these are basic analysis models. They allow you to quickly evaluate the company already at the preparation stage. For analysis, take statistics, neglecting the indicators inherent in specific time steps.
Techniques:
- payback period calculation;
- calculation of simple income standards;
- discounting of investments, financial flows.
Strategic planning
Strategy is the choice of such a direction for investment, which will allow in the future to receive an effective return on the funds invested in some enterprise. Planning is the center of investment activity of any modern company. Strategic planning involves the formation of a plan that takes into account the goals of the company, its problems, and also analyzes their development. Financiers dealing with this issue choose basic strategies and predict the development of the situation. All these measures are aimed at the effective functioning of the enterprise not only in the present tense, but in the future - after years and even decades.
Strategic planning is:
- system of plans;
- planning;
- planning management;
- organizational support;
- information flows;
- decision making system.