Whenever your business acquires, develops, maintains, or improves upon physical assets in furtherance of long-term goals, you’re engaging in capital investment. There are many benefits to making capital investments, from increased production capacity to decreased costs. Plus it’s a key driver of economic growth, as businesses reinvest their profits back into the economy.
These investments can include things like acquiring new Industrial Machinery, updating the existing machinery, building a new factory, or upgrading an existing one. Capital investments can also include purchasing new land, buildings, or equipment.
However, capital investment can also be a source of risk for businesses. Below are four pitfalls your business should avoid when making capital investments.
Over-Investing in One Asset
Finding assets that are low risk and high yield isn’t the easiest thing so it can be tempting to sink a large chunk of your investment into a single asset with huge potential. However, this move leaves you vulnerable to changes in the market or unforeseen circumstances.
For example, let’s say you invest more than half of your budget into a piece of industrial machinery to increase your production. However, soon after you make the purchase, new technology is developed that makes your machine obsolete. Not only have you lost a significant amount of money, but you’ve also missed out on an opportunity to invest in something that could have been more profitable.
By investing in a variety of assets, you can mitigate some of the risks associated with capital investment.
Failing to Do Your Due Diligence
Finding a senior living facility, choosing among schools for your toddler, buying a vintage car – certain decisions simply mustn’t be taken without verifying certain facts.
Investing in assets without fully understanding their value or the risks involved is a recipe for disaster.
For example, imagine investing in high-tech automation software for your business without finding out about things like post-installation updates and training costs, bug fixes, security weaknesses, etc.
Any one of these issues could turn this asset into a liability.
Investing Without a Plan
A common mistake businesses make is investing without a clear plan or strategy. Without a goal in mind before making any type of investment, you could end up wasting money on assets that don’t help your business achieve its objectives.
For example, let’s say your goal is to increase production by 20% in the next year. You wouldn’t want to invest in office furniture or a new computer system, as those things wouldn’t help you reach your goal. Instead, you would want to focus on investments that would directly increase production, such as a new piece of equipment or hiring additional staff.
Trying to Time the Market
Trying to time the market is a risky gamble that often doesn’t pay off. The reality is, no one knows when the market will rise or fall, and attempting to predict these changes can lead to costly mistakes.
For example, let’s say you’re considering investing in a piece of real estate. You might want to wait to make the purchase, thinking that the price will go down. However, if the market unexpectedly starts to rise, you could miss out on a great investment opportunity.
Thus, it’s often better to make your investment when it makes sense for your business, regardless of what the market is doing.
Making capital investments is one of the primary ways to improve your business. However, there are some risks associated with these types of investments. By avoiding these four pitfalls, you can increase your chances of success.