This chapter deals with investment, presenting the particular case of SME investment. The idea is to help to better understand why, where, and how a company should invest. Therefore, the concept of investments, SME assets, distribution, acquisition, or reproduction are analyzed. One of the topics also addressed in this chapter is the evaluation of investments, more specifically through cash flows. Finally, a practical example of investment evaluation methods using static and dynamic methods is presented to show its application.
TopInvestments
An investment is defined as funds that have been invested in a specific project for appreciation and return. Investment can also be defined as the portion of income that is invested in the capital – in durable goods (czechinvest.org). This part of the income does not bring immediate benefits but will increase the production of goods in the future.
The main meaning of investment is primarily the investment of current financial surpluses in goods that are expected to return a positive appreciation. In economics, investment has two meanings (Liu et al., 2021):
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The amount of investment and its effect on aggregate demand and employment;
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Investment leads to capital accumulation (when more factories are built, more goods will be produced in the future.
The essential characteristic of any investment, apart from profit, is the degree of risk, which means, the uncertainties related to it since it means the acquisition of an asset that will provide (expected) some future economic benefit to its owner (Liu et al., 2021). Investments in tangible goods, such as works of art, are less risky than in securities. Typical investments are bonds, shares, real estate, works of art, or precious metals (gold, silver, platinum, diamonds, etc.). It is also a very capital intensive activity, as it mainly involves the purchase and application of new production technologies or the introduction of new products.
In terms of the financial category, investment can be characterized as a major cash outlay which is expected to be converted into future cash receipts, over a longer period of time (Liu et al., 2021).
In investing, prospective investors must ask themselves an important question. Where to invest? There are several options where investors can invest. It can be property, finance, or human capital.
Property
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Tangible fixed assets - e.g., expenditure on renovation or expansion of tangible fixed assets, i.e. purchase of machinery, etc.
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Intangible fixed assets - e.g., expenditure on research, advertising, etc.
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Current assets - expenditure on permanent additions to stock, etc.
Finance
Expenditure on the purchase of long-term securities - shares, bonds, etc. Access to finance remains difficult in developing countries, both in terms of demand and supply (SMEFINANCE, 2020). SMEs are less attractive clients for financial institutions because their activities generate less revenue. In the case of SMEs, the risk associated with the operation is higher because their business is more volatile and there is no guarantee (European Microfinance Network, 2012 and 2015). The European Commission (2003) has recognized through several studies that the problems of access to finance for SMEs in developing countries require measures that effectively support business development.