Today, a large number of companies are at different stages of implementing their investment projects. Someone had a project at the initial stage, someone had already done most of the work, and someone was at the stage of launching an investment project when there was a significant change in the economy of our country last year. In order to make a decision to continue or not to continue an investment project, you need to weigh all the pros and cons, analyze the risks and opportunities. It is not correct to freeze the project immediately in case of an unfavorable development of events. Perhaps we can’t stop right now. Perhaps right now is the time when continuing to move in the shortest possible time, you can make a significant leap, and sometimes just survive. At what point does the company need to make a decision about the future of the investment project?
Let’s start with the concept of what an investment project is. This is a program of activities related to the implementation of capital investments and their subsequent compensation in the form of profit.
What is the purpose of the investment project — to get the result that will be achieved due to the successful implementation of the project in the planned conditions of its implementation.
The investment project is intended to enable the company to enter new markets for it, expand its sphere of influence, customer base, and product or service line. The prosperity of any company depends to a large extent on the right investment policy. This policy is always costly and risky, but with the right calculation, the costs will pay off and the company will reach a new level of development.
What are the options for minimizing losses when closing an investment project?
Option I-freeze the project for a while
For example, conducted research, formulated the main ideas determined the purpose and scope of the future project, conducted a comprehensive analysis of potential markets, their capacity of consumers, the assessment of costs that need to be done for production and marketing of products/services conducted by comparing the costs with prices at which you can sell goods/services. Possible pitfalls that may arise in the way of the project implementation are also analyzed, and solutions are even provided to overcome possible obstacles. A sufficient amount of preparatory work has already been done, and then you realize that a sufficient number of points are being revealed that raise questions, but is it still possible to implement the project? If there are too many questions, the best option is to freeze the project for a while and deal with all the points. It is important to understand whether it is possible to implement the idea that has arisen with the specified parameters or not.
The author was faced with such a variant of actions with an investment project in the most indicative direction of business – development. When the crisis of 2008-2009 arose in Russia and developed for several years, this industry felt all its echoes. The author was the head of financial management at one of the companies in the industry. At the time of the crisis, the company stopped the implementation of all projects. in 2010, the market gradually began to revive and the company began to revise its strategy for frozen projects. Concepts and business plans were revised for all projects. The project implementation strategy has also been changed. Gradually, the company began to get out of the crisis situation and continue to implement some of the previously conceived projects, and abandoned some projects in favor of new ones.
The second option is to reorganize the project
Let’s say a significant amount of time was spent, a business plan, a feasibility study, and a financial model were drawn up. You have already received an answer to the question: whether it is worth starting an investment project at all, investing money in this business and whether it will bring income that will pay for all costs. And then the situation changed: the goals became different, the economic or political situation changed, another more profitable project appeared, or perhaps there were changes in the company, a new partner was added. It is possible that some funds have already been invested, or perhaps a sufficient amount of funds, and at the time of signing the loan agreement with the Bank, the conditions offered by the Bank have changed. Inflationary and deflationary risks could arise, as well as changes in foreign exchange rates, securities quotations, and prices for raw materials and goods. This was the case in December 2014, and in previous years, too. All this leads to a change in the value of the asset that is the object of investment. In these cases, you need to reorganize the project.
It will help to take a different look at the project and reorganize its financial model from the point of view of assessing the reality of implementing the investment idea, calculating the necessary amounts of funding, and the degree of protection from financial and other investment risks.
You can work with changes in legislation, General economic risks, changes in exchange rates, rising inflation, recession or growth of the economy, which is accompanied by increased competition. If you purchased goods abroad for foreign currency, you need to quickly work out the issue of import substitution, and it is better to always have this option in reserve. If one market is closed, then you need to look for sales in another market. There are many solutions, it is important to keep your finger on the pulse, monitor the situation with the sale of products/services and then adapt to the new conditions will be faster and less painful.
Effective professionals are one of the keys to successful project implementation. But there is always a risk of the so-called human factor. All the documents for the project implementation have been fully worked out and prepared, but the result is not achieved for some reason. This is also possible due to the wrong team. Even in high positions, people sometimes work for the sake of work, not for the sake of results. Sometimes a person has broken communication skills and relationships in the team or with partners are not built in the right direction. It is very important to monitor the implementation of the project and, if necessary, adjust the team if problems arise in it.
The third option is to close the project
Finding the optimal combination of profitability and risk requires analyzing many different factors, which makes this task very difficult. The implementation of most investment projects involves a significant risk of losing part or even all of the invested capital, and the risk of loss is higher the higher the level of income expected from the investment. Careful analysis and planning are essential for a future successful investment project. If, after a thorough analysis and planning, there are doubts about the future effectiveness of the project, it is better to complete it.
An important parameter in the implementation of an investment project is the payback time. The essence is to determine the time required for the return of invested funds. Of course, projects with the shortest payback period are preferred. If the timing of implementation becomes unacceptable, it makes sense to close the project, so as not to receive large losses.
The company may experience problems in the changed conditions – with the availability of raw materials, unsuccessful marketing actions, the loss of large contracts, the influence of foreign competition, the impact of certain government measures. External events undoubtedly have an impact on the market as a whole (war, inflation, economic recession, political difficulties). Administrative restrictions on investment activities, the emergence of economic regulations, changes in taxation, currency regulation, interest rate policy, securities market regulation, legislative changes, changes in the market environment, adverse changes in the overall economic situation or the situation in individual markets due to changes in the stages of the economic cycle, the development of the country all this may ultimately lead to the need to close the project.
One of the author’s clients, the owner of beauty salons, faced the need to close their salons in the street-retail format a few years ago. For several years in a row, the business brought enough income for the owner, but then the situation changed and the salons became unprofitable. The owner moved to shopping centers and established cooperation with fitness clubs.
The fourth option is to sell the project
Investment activity is always associated with risks. Its successful implementation depends largely on how well the task of finding the optimal ratio of profitability and risk can be fulfilled. The threat of loss of profit, loss of expected revenue, loss of all property, bankruptcy of the company, lack of funds for financing, changes in investor plans-significant indicators for the sale of the project. It is also a common situation when there are more than one investor or business owner and there are disagreements about the expected profitability and direction of business development. Unable to agree on these and other issues, the owners decide to sell the business.
I-freeze the project for a while This option will help avoid possible losses. It is more logical to stop for a while, to rethink whether there is a possibility of implementing the idea under the new conditions under the given parameters or not.
II-reorganize the project Keeping your finger on the pulse, monitoring the situation with the sale of products/services, adaptation to new conditions will be faster and less painful.
III – closing the project Administrative restrictions on investment activities, the emergence of economic regulations, changes in taxation, currency regulation, interest rate policy, regulation of the securities market, legislative changes, changing market conditions, adverse changes in the General economic situation or the situation in individual markets as a result of the shift stages of the economic cycle, the country’s development all these factors are reason to think about the need to close the project.
IV-sell the project If there is a threat of loss of profit, loss of expected revenue, loss of all property, bankruptcy of the company, lack of funds for financing, changes in investor plans, the project is likely to need to be sold.