Investment plan at a glance

Any business venture is associated with investment. An investment concerns a long-term commitment of financial funds in material and immaterial assets. Investments not only affect a company’s fixed assets but indirectly its current assets as well. Investment planning is an integral component of strategic business planning. The business plan should consider investments as part of finance planning.

Investments are not only associated with a high capital expenditure and a long-term capital commitment, but investment decisions also have a decisive impact on a company’s cost structure. Before investing money in a business venture, you should therefore closely examine how much capital you need to invest in order to realize the project.

The capital requirement of an investment is determined as part of an investment plan. This provides a basis for investment calculations and the profitability forecast. That means it's necessary to list all costs related to an investment in order to assess the business.

In the following, we show you how to prepare an investment plan as part of a business plan for strategic or operational business planning.

An investment plan refers to a table that lists all investment items and corresponding costs linked to a particular investment. Here, it’s important to be aware that the investment plan only encompasses the expenses incurred as one-off costs in connection with the investment and during the start-up phase.

An overview of the ongoing monthly costs (such as staff costs) is drawn up in the operating expense plan, independently from the investment plan.

The investment plan and the operating expense plan subsequently form part of the capital requirements plan.

In business practice, an investment plan is always created when an investment decision has to be made – usually for one of the following reasons:

• Initial investment: Initial investment refers to the procurement of all operationally required assets in connection with founding the company.
• Replacement investment: Replacing an asset of the company with a new asset is called a replacement investment.
• Rationalization investment: Rationalization investment denotes investments that result in a cost saving.
• Expansion investment: If the expansion of business operations necessitates the procurement of assets, this is referred to as an expansion investment.

As part of a comprehensive finance plan, the investment plan is not only the basis for the business plan but also a guideline for financing. It thus represents a prerequisite for raising capital. You should present the itemization in a transparent and structured manner so capital providers like banks or private investors get an overview of all expenses associated with the investment. Generally, you’ll only receive an investment loan if your backers are able to see where you’d like to use the borrowed funds.

In an investment plan, you draw up a list of all one-off expenses for all investment items associated with an investment, including the costs incurred during the start-up phase for advance financing. If it concerns an initial investment for incorporating a business, the investment plan will also contain all costs associated with establishing the company.

We illustrate the structure of an investment plan using the example of an initial investment and apply the following outline for this purpose:

1. Capital requirement for the (formal) incorporation of the company
2. Capital requirement for ongoing operating expenses in the start-up phase
3. Capital requirement for investments in fixed assets
4. Capital requirement for investments in current assets
5. Expenses for debt servicing

If your planned investment concerns an initial investment, you should list the costs of incorporation in the investment plan separately. The capital requirement for formally establishing the company includes all expenses incurred in preparing the founding process – for example consulting costs as well as fees for registration, permits or notary certifications.

Moreover, investments are usually associated with expenses for material and immaterial assets. A distinction is made between fixed and current assets. Fixed assets are all assets you procure as part of investing for continuous use in operations – such as equipment, machines or vehicles as well as immaterial assets like licenses and patents. Assets such as goods, materials or resources used for disposal, consumption or processing – and are therefore held by the company only temporarily – are allocated to current assets.

For investments which you wish to fund entirely or partly using borrowed funds, you should also indicate the expenses for interest and repayment installments in the investment plan.

1. Costs of incorporation/one-off expenses in the start-up phase
   1. Rent deposit
   2. Legal advisors
   3. Tax advisors
   4. Business advisors
   5. Business registration
   6. Development of a corporate design
   7. Opening event
   8. Opening advertising
   9. Website setup
   10. Market information
   11. Registrations/approvals
   12. Entry into the commercial register
   13. Notary
   14. Reserves for start phase, follow-up investments and unforeseen costs
2. Fixed assets
   1. Patent, license and franchise fees
   2. Plots/real estate including incidental costs
   3. Production equipment, machines and tools
   4. Operating and office equipment
   5. Communication technology (PCs, telephones, etc.)
   6. Software
   7. Vehicles
3. Current assets
   1. Materials and goods inventory
   2. Raw, auxiliary and operating materials
4. Debt servicing
   1. Interest on founding loan/bank credit
   2. Repayments

All the above details are added up in the investment plan. The final amount of the investment plan indicates how much capital you need in the initial phase of the investment to implement the planned project.

Make sure that you have specific offers for the individual cost items. Only then will you ensure that the amount of the necessary investment is determined as thoroughly as possible.

As part of the finance plan, the investment plan is also part of the business plan. It is typically combined with an operating expense plan in the finance plan.

While the investment plan only covers one-off costs and additional expenses during the start-up phase, the operating expense plan provides backers with an overview of the ongoing costs of your company.

Operating expenses include:

• Staff costs (including wage and incidental wage costs) as well as your own salary as managing director for stock corporations (all costs including incidental wage costs)
• If relevant, a management wage (to ensure personal living costs for sole proprietorships and partnerships)
• Rent, tenancy and leasing
• Rent deposit
• Heating, electricity, water and gas
• Market development expenses (advertising and marketing)
• Motor vehicle costs
• Travel costs
• Telephone, fax and internet
• Office materials
• Packaging
• Insurance
• Contributions (to chambers of commerce and professional associations, for example)
• Consulting (lawyers, business consultants and tax advisors)
• Other expenses

By adding the investment amount determined in the investment plan to the total from the operating expense plan, you obtain the capital requirements of your business venture.

You show how you cover this capital requirement in the financing plan – another part of the finance plan. Since investment projects are typically funded by a combination of equity capital, subsidized loans and bank credit, it is critical that you take interest and repayments into consideration when planning capital requirements. Intermediate bottlenecks can be identified by means of a liquidity forecast.

In addition, it’s important to ensure that all operating costs as well as your cost of living are covered by your company alone following the budgeted start-up phase and that there are no fears of long-term losses. You can calculate whether your investment makes financial sense using a profitability forecast, which likewise forms part of the finance plan. If you’d like to assess how your investment compares to alternative options, an investment appraisal technique such as the net present value method can be helpful.

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