Meanings of Investment

Meanings of Investment

The term “investment” appears both in connection with business decisions and in connection with private financial planning. Experts then often speak of an investment. Consequently, the terminology is important in both business administration and economics.

  • An investment is the long-term commitment of capital and aims to generate income.
  • Investments can be classified, among other things, on the basis of the investment object, but also on the basis of their purpose.
  • With the help of the investment calculation it is possible to check whether the investment of financial resources is worthwhile in a specific case.
  • While the static calculation method provides a rough overview, the dynamic method provides more precise results.

What is an investment? A definition

According to the definition from digopaul, an investment describes the long-term commitment of financial resources (capital) in tangible or intangible assets. The purpose of investing is usually to increase an individual’s personal wealth or to increase corporate profits – that is, in future economic returns. Consequently, when making an investment, the focus is on using the available financial resources in a targeted manner. From a cash flow-oriented point of view, every investment initially causes expenses, which later flow back and should be amortized. But that doesn’t always work in practice.

What types of investment are there?

Individuals and companies have numerous options for investing money. In principle, investments can be classified in different ways, for example on the basis of the investment property:

  • Physical investment(also real investment), for example the construction of a factory or the acquisition of a machine
  • Financial investment, for example the purchase of stocks, bonds or investments
  • Intangible investment, for example the acquisition of patents, licenses or concessions

It is also possible to subdivide investments according to their purpose or the underlying motivation. The following forms are mainly used for this classification:

  • A start-up investment includes all expenses incurred in setting up a business.
  • A replacement investment is used to replace existing assets that are worn out or inoperable.
  • An expansion investment aims to increase operational capacity.
  • A rationalization investment improves or modernizes existing systems in order to reduce costs or achieve greater efficiency.
  • Other forms: diversification investment, conversion investment, depreciation, gross investment, net investment

Investment calculation: essential as a basis for decision-making

Usually, an investment is difficult to reverse. The reasons are on the one hand the high capital intensity, on the other hand the long-term commitment. Due to the future-oriented nature of a system, the associated deposits and withdrawals are also uncertain. That is why there is a need to invest the available funds as efficiently as possible.

The investor can use the investment calculation to find out whether an investment is worthwhile in a specific case. It also helps you to find the most worthwhile investment among various alternatives. Both static and dynamic calculation methods are suitable for this.

The static investment calculation

One of the greatest advantages of the static method is that the calculation is comparatively simple. However, the various methods only take into account certain periodized major costs, so that the results are relatively imprecise. Nevertheless, the static investment calculation is suitable for getting an initial overview. Typical methods are, for example, the cost, profit and profitability comparison calculation as well as the static amortization calculation.

The dynamic investment calculation

The dynamic calculation method gives a much more detailed information. The reason for this is that this method integrates the different times of deposits and withdrawals into the invoice. However, this leads to a significantly higher effort. The capital value method, the internal rate of return method and the annuity method are often used.

Statements on the investment situation of a company through key figures

Companies can use financial indicators to assess their investment situation. The plant intensity, the stock intensity and the investment rate play a role here. In general, companies can act more flexibly the lower the investment quota is. This describes the relationship between the fixed assets and the balance sheet total. The inventory intensity, on the other hand, indicates how much capital is tied up by the raw materials, consumables and supplies as well as semi-finished and finished products in the warehouse. The higher the quota, the greater the storage risk due to a possible drop in prices. Finally, in a business sense, the investment quota describes the relationship between investments in fixed assets and sales.