How to Make Smart Investment Decisions

Consider these ten things when you're using the NPV, IRR, or payback method to make a capital budgeting or investment decision.

1. Remember that the reason you're making a capital budgeting decision is to create more value in the future than exists today! Don't commit yourself to a future course of action that is not profitable in the future under all possible conditions you can think of today and expect tomorrow. The value of a decision is not only centered in its expected results, but it is raised or lowered according to the number of decisions in the future that it does not preclude, but allows , and those for which space is created. This statement has profound meaning for the futurity of decisions and the design of decisions by decision makers!

2. Always use cash flows and not accounting income to create your investment decision. Cash flows are the result of the total effects of implementing the project or investment scenario only AFTER all costs are removed!

3. Do not include sunk costs in your investment analysis. They are already spent, gone, kaput; use only the costs that will be incurred by the new project or investment. There will be a tendency to--see how much we've already invested--use sunk costs to justify going ahead with the project anyway--DON'T! It would be irrational to use past expenditures to consider a decision which can only affect the future!

4. You must consider "opportunity costs" as costs of the project or investment. If you use something that could be used for something else, the cost to replace the use of the something else must be included in your capital budgeting analysis. Always consider alternative uses of capital and resources as costs to the capital budgeting project or investment.

5. Look beyond. You must consider not just the first order of consequences, but the orders of consequences following your project decision. Build a scenario of contingencies given the project decision. Look at the downstream effects of the decision, what are the side effects? Are there hidden costs, if so add them to the decision. Will the project steal market share from ongoing investments? What is the expected effect of these losses?

6. What are the effects of the non-conformities. Don't let the assumptions you make about the present and the future be "blinding." In the world we live in today, things change--overnight! What about the nonconforming assumptions you make? How flexible are the beliefs that you have established the project parameters upon? Accounting for this now, will keep the value of the project in real terms.

7. Part of the reason that NPV calculations come out the way they do is because of IRR or Internal Rate of Return. IRR is designed to calculate the "discount" rate at which the cash flows of your project are discounted. Make sure that the IRR, discount rate, hurdle rate and the project discounting rate are sufficiently related or indexed to the market environment. If you used a discount rate of 5% and the real rate of inflation soared to 10% during the project--which happened in the early eighties--your project assumptions could create disaster for the company or your investment. Don't just assume that because you have an IRR of x% that you should use that % to discount cash flows under NPV calculations.

8. Consider the utility of time not just the time value of money. With change occurring so rapidly, how quickly you get to the marketplace often determines how much utility is available for your investment decisions. It is extremely difficult to calculate the utility of ideas--often the marketplace is the only valuing entity--but as a planner you must gain a feel for what happens if you're not first, your project is outdated before you go online, or sudden shifts in macroeconomic factors change project assumptions. THERE AREN'T ANY GUARANTEES--BUT, he who ventures forth blindly, even though with courage and certainty, may need a parachute!

9. Consider risk management, contingency planning and disaster recovery as a cost of the project! Risk analysis, business interruption and disaster recovery are important factors when considering the ultimate cost or discountability of cash flows. What is the risk level of the project or investment? How can this "cost" be factored into the calculation? If the project is a complete failure, is wiped out by unforeseen contingencies or even hampered by personnel problems, what will be the effect on the company, organization or investment?

10. Last, but not least, a maxim from Professor Sharpe at Standford University who says, " it is important to remember that investment opportunities may influence one's consumption decision and that consumption opportunities may influence one's investment decision."

Predict Your Future. Don't use a crystal ball to make forecasts of your business. By carefully assessing the historic trends of
your business, as shown on your records for the previous five decades, you can predict for the year ahead. Your record of
earnings, your expertise with the markets where you sell, and your general understanding of the market should allow you to predict
a sales figure for the next calendar year.

When you have a Sales prediction figure, make up a budget showing your prices as a proportion of the figure. Within the next year,
you can compare real P&L amounts for your budgeted figures. Thus, your budget is an important tool for determining the health of
your enterprise.

Make Timely Decisions. Without action, forecasts and decisions about the future are not worth the paper they are written on. A
decision that doesn't result in action is a bad one. The pace of business demands timely in addition to informed decision making.
In case the owner-manager would be to stay ahead of competition, you have to move to control your destiny.

Powerful Decision making from the small business requires a number of things. The owner-manager must have as much accurate
information as you can. With these facts, you need to determine the effects of all feasible courses of actions and the time
requirements. When you have created the decision, you have set up your business so the choices you make could be transmitted into
actions.

Control Your Business. To be effective, the owner-manager must have the ability to motivate key individuals to acquire the
outcomes intended for within the cost and time limits allowed. In working to achieve results, the small business owner-manager has
an edge over large business. You can be fast and flexible while many big firms must await committee action before a choice is
made. You don't need to get permission to act. And equally important, bottlenecks to implementing new practices may get your
personal attention.

One of those Secrets is in deciding what things to control. Even in a small business, the owner-manager shouldn't try and be all
things to everyone. You should keep close control on people, products, cash, and any other tools that you consider important to
maintaining your operation pointed toward profit.

Manage Your Folks. Most companies realize that their largest expense is labor. Yet because of the close contact with workers, some
owner-manager of small businesses don't pay sufficient attention to direct and indirect labour costs. They tend to consider those
prices in terms of individuals rather than relate them to gain with respect to dollars and pennies.

Here Are Some Suggestions concerning personnel management:

Periodically Review every position in your company. Take a glimpse in the job. Is work being replicated? Is it organized so that
it motivates the employee to become involved? Can the tasks be given to another employee or employees and a position removed? Can
a part-time person fill the occupation.

Perform A little personal mental game. Imagine that you must eliminate one employee, If you had to let 1 person go, who'd it be?
How can you realign the tasks to make out? You could get a real solution to the fanciful difficulty is possible to your financial
advantage.

Use Compensation as a tool rather than seeing it as a necessary evil. Reward quality work. Investigate the potential for using
raises and bonuses as incentives for greater productivity. By way of example, can you envision bonuses as morale boosters during
seasonal slacks or alternative dull periods?

Remember That there are new ways of controlling absenteeism through incentive compensation plans. For example, the owner-manager
of one small business eliminated holidays and sick leave. Rather, this owner-manager gave every worker thirty days annual leave to
use as the employee saw fit. At the end of the year, the workers were paid at regular rates for the leave they did not use. To
make up for the year-end pay, the employee had to establish that sick leave was shot solely for that purpose. Non-sick leave had
to be applied for in advance. Because of this, unscheduled absences and overtime pay have been decreased significantly. In
addition, workers were happier and more productive than they had been under the older system.

Control Your Inventory. Do not tie up all your cash in inventory. Use a perpetual inventory system as a cost control rather than a
system just for taxation purposes. Establish use patterns or purchase patterns on the substances or items you have to stock to
maintain the minimal number needed to supply your customers or to preserve production. Excessive stock, whether it is finished
merchandise or raw materials, ties up funds which may be used to better advantage, as an instance, to open a new sales territory
or to purchase new machinery.

Centralize your Purchases and avoid duplications. Be a relative shopper. Confirm orders . Get the price and amount straight right
away.

Check what you Get for condition and quality. Assess bills from providers against quotes. You do not want to be the victim of the
error.

You should, However, keep one fact in mind once you set up your inventory control system. Do not spend more on the management
system than it can yield in savings.

Control Your Products. From charge of stock to control of products is but a step. Ensure your sales people understand the value of
selling the products that are the most profitable. Align your service policies with your own markup in mind. Arrange your products
so that low markup things require the least handling.

Control Your Money. It is good policy to handle checks and cash as though they were perishable commodities. They are. Money on
your safe earns no recurrence; and it Can be stolen. Bank promptly.

Abaya Accessory Accounting Acrylic Nail Ad Agency Agarbatti Agency Agro Air Conditioning Service Airbnb Airsoft Alcohol Aluminum Can Recycling Antique Any Small Apartment Apparel Appliance Repair App Aquarium Arcade architecture art gallery ATM Auto Body Shop Auto Detailing Auto Rickshaw Auto Transport Automotive Used Parts Axe Throwing Babysitting Bail bonds Balloon Bank Banquet Hall Barbershop battery BBQ Catering BBQ Food Truck BBQ Sauce beauty parlour bed bug Big bike rental Bike shop Billion Dollar Bird Breeding Biryany Bitcoin Blacksmith Bling Shirt boat rental Bookbinding Bounce House Bow BPO Bracelet braiding