Technological investments are a part of business. Your business can spend $1 million to invest in new technology and equipment, but how will these technologies transition to profit? That’s the question.
Increased investment doesn’t necessarily mean improved financials.
And small businesses need to know how to maximize these investments, or maybe they shouldn’t invest in certain technologies too early. Oftentimes, a small business will make an investment that keeps them cash-strapped and not able to recoup their money fast enough.
Missed opportunities can be a result of these decisions, which leads to lost financial gain.
Business Case Analysis
Subjectivity in an investment can be offset by business case analysis. Budgets are meant to be broken on occasion. A plumber may want to invest in hydro jetting, or a beer producer may want to buy self-driving trucks. In either of these cases, the costs need to be justified.
You’ll need to determine:
- ROI (return on investment)
- NPV (net present value)
- IRR (internal rate of return)
- Repayment period
Financial professionals point to return on investment as the key more important factor in analysis. But there’s also a major flaw that often goes overlooked:
What is NPV? This is the time value of money, or the value of cash inflows and outflows at the given time. If NPV falls into the negative range, the investment should not be made.
Analyzing all of the four metrics above works best to be able to evaluate technology investments. You’ll also need to consider the following:
- True cost of investment
- Cost to train employees
- Cost to use new technology
Employees may need to be trained, and you may need to hire all new employees to ensure that the investment is maximized.
Equipment or technology that goes unused or isn’t harnessed properly won’t make a business more money.
Business case analysis requires more than just forecasts. You need to make a strong case for an investment through the use of scenarios. The scenarios that you come up with will need to include:
- Low case
- Medium case
- High case
Making a pitch for investment to executive board members is best done by presenting the low case. The low case is best when trying to mitigate project risk. Projects almost always go over, and this is true with investments.
You’ll need to present market research and ask yourself questions before making a significant investment in any technology or equipment.
Small business owners who are ready to make a significant investment in their business to offer a new service or product will also need to judge demand. This can be done through market research, or you can begin surveying your own customers.
Using the above example, a plumber can ask his or her clients to answer a few questions on a potential new product or service.
You’ll be able to determine if the new technology is a viable option in your field and specific market this way. You may also find that the technology is slated to fall in value soon, so it may be best to wait a year for the price to fall significantly.