An introduction to figuring out when it’s the right time to invest in your business
Deciding on the best time to invest in your business is not a simple matter. Indeed, there are often good reasons both for going ahead and delaying your plans. Very often it’s a judgment call.
On the face of it, investing in new bigger premises or better technology in an economic downturn doesn’t sound like a good idea. However, the counter argument is that a business that invests at the bottom of the market should be well-placed to reap the benefits when the economy and market rebounds.
Similarly, a business that borrows to invest in a downturn, when interest rates are low, will be at an advantage compared to those who wait for the economy to recover, when the cost of borrowing is likely to be higher.
UK business investment has been impacted by the coronavirus pandemic. According to the ONS, investment in the fourth quarter of 2020 was ten per cent lower than the same period in the previous year.
That said, the pandemic is having a positive impact on some types of business investment, particularly in employee health and well-being. According to a survey of UK CEOs by PwC, 66 per cent say they are increasing their investment in leadership and talent development.
Thinking about making an investment in your business? This guide will help you understand what factors influence the timing of investment, highlight common mistakes and share quick wins you can start implementing today. The next step will be to use our action plan to direct your change and improvement.
What underlying factors could influence the decision to invest?
Your existing management and staff are overstretched
As your business grows, one signal that it is time to invest is when you and your staff are struggling to cope.
Perhaps response times for answering phone calls have gone up or there has been an increase in customer complaints. Maybe more staff are leaving or sickness absence rates are rising. It’s important to act on these warning signals.
Hitting significant milestones
One factor that might influence when a business invests is hitting a significant milestone. For example, when profits reach £1m or you hit a certain number of clients. Milestones provide an effective target and are a good way to recognise when the business needs investment.
An established and growing market for your product or service
When you have established a solid business with a growing demand for your products or services it may be the time to invest, so that you can take the next step forward. A common signifier is that you have developed a standardised, simplified product for which sales quickly respond to increases in investment in sales or marketing.
Having access to funding
Your ability to access funds for investment may not always be something you can control. If a business decides it wants funding from a bank, it may have to delay investment until it has a reliable trading record to satisfy the bank’s lending criteria.
Your equipment and technology is outdated
A tell-tale sign that it is time to invest is if your business uses outdated equipment or technology. Investing in more modern equipment and technology can pay for itself by boosting productivity. However, it is also likely to mean investing in staff training.
“Instead of any milestones, what influences when we invest is our ongoing desire to progress. Whether it’s developing new software or offering more marketing services, the attitude is always no matter how good we are, we can improve – and the question is how much better can we serve both our members and clients.”
Alec Dobbie, CEO and co-founder FanFinders
The cold hard facts
According to a PwC report, more than three quarters (77 per cent) plan to increase their investment.
Common mistakes businesses make with the timing of investments
Leaders are too slow
Failing to invest in time means you risk falling behind your competitors, who will be quick to take advantage. Stagnation is a real threat too. It’s hard for a business to stay still while the world changes around it, it may be better to take a risk and invest in your business than let the value you provide become eroded over time.
The investment is not coordinated with actions across the company
Investing money, time or resources will only deliver the benefits you expect if it is part of coordinated actions across the company. For example, unless your marketing and sales teams work closely together, investing in an expensive marketing campaign is unlikely to be effective.
Fools rush in
Even when the funding, be that debt or equity, that you need to invest in the business is available, rushing in straight away to accept it can be risky. Not only might the terms be unfavourable, but you could end up losing more than you bargained for.
“A rushed investment is dangerous, especially if you’re desperate at this point. You could very easily end up with the wrong investor or haven’t done your due diligence correctly. In the worst case, you could end up forced to give away more of your business than you wanted.”
Carley Jones, co-founder of Boombae
The cold hard facts
According to research for Harvard Business Review, only 26 per cent of such companies come out as leaders after an economic recession, compared to 21 per cent that cut costs faster and deeper.
The trick is to master the delicate balance between cutting costs to survive today and investing to grow tomorrow – this group had a 37 per cent chance of breaking away from the pack.
Quick wins for knowing when it’s the right time to invest in your business
Invest now, you may not get another chance
Change happens fast and the market is always evolving. Failing to make an investment or delaying investment that has the potential to transform your business can mean those opportunities are lost forever.
Be prepared to change your plans
Rather than sticking too rigidly to an investment timetable it pays to be flexible. Perhaps, developing your new product is taking longer than anticipated. However, if things are running ahead of plan why not make that investment earlier allowing you to reap the benefits sooner?
Take advantage of the financial health of the company
While a company in a weak financial position may have to delay its investment decisions until things improve, when a company is in a strong financial position this can be the ideal time to invest. That said, even in such favourable circumstances investing your hard-earned cash takes courage.
Speak to peers that have experience of being at a similar stage
Talking to business leaders that have been in a similar situation is a great way to identify ways to evaluate investments. What factors did they look at? What were the biggest drivers?
“For us, the risks and potential costs of not having enough space for expansion heavily outweighed the risks of buying a space to grow into. If you want to grow and you’re considering investing in a bigger facility, seek the advice of professionals who deal with these scenarios on a daily basis.”
Nick Pollitt, managing director of Diamond Interiors
The cold hard facts
The gap between the demand and supply of capital that’s needed to enable scaling innovative companies has grown from £5bn-£10bn a year before the coronavirus pandemic to £15bn, according to the ScaleUp Institute.
Now you’ve learnt about some of the factors that influence when you invest in your business, use our action plan to direct your improvement efforts.