Investment costs

This concept is closely related to costs, expenses, since any investment is an expenditure of funds to obtain profit within a certain time frame. Investments in business are associated with the acquisition of capital (financial or physical), which will subsequently bring in money. In practice, in this regard, they often talk about capital investments.

For example, an investor invests in the purchase of securities. Then the investment costs will include not only the purchase itself, but also the costs of commission fees, bank account maintenance, etc.

If we are talking about a classic business (for example, opening a store), then the investment costs of companies include all types of costs that are needed to create an enterprise and its successful functioning - for example, rent, purchase of goods, equipment, raw materials, transportation costs and much more. The creation of a company and its development is always associated with investment costs. Therefore, the ability to calculate expenses, as well as weigh the possible risks is very important for any investor. To do this, first of all, you need to understand what types of expenses are encountered in practice, i.e. learn about their classification.

Classification of expenses

There are quite a few criteria for classifying investment expenses. From a practical point of view, they are important in the sense that they help to organize the cost estimate and more clearly imagine which expenses take up a larger or smaller share. Thanks to this, the investor can already at the initial stage foresee which types of expenses can be saved on and how best to do this.

Fixed and variable

Strictly speaking, any expenses are variable, since in a market economy no price is fixed except in extremely rare cases (for example, vital drugs, social goods, etc.). Therefore, in the long term (3-5 years or more), any investment expense will change - usually in the upward direction.

However, if we talk about the short term (1-2 years), then all expenses should be divided into 2 categories:
Fixed costs do not change during this time and do not depend on production volumes. These are rental payments, capital repair costs, administrative expenses.
Variables change and directly depend on the volume of production: the more products are received, the higher the expense. These are raw materials, electricity and other utilities, transportation costs. From a practical point of view, it is important for an investor that all expenses "work" with maximum efficiency. For example, there are variable costs for electricity for the operation of production equipment. If the device produces 100 units of products per day, but can work twice as powerful, it is worth increasing its productivity. However, using it at full capacity leads to rapid wear, so in each case it is preferable to make some kind of compromise solution.

Direct and indirect

Direct costs are directly related to the investment project, since they are aimed directly at maintaining the facility. These are the investments themselves (acquisition of financial assets), company registration, wages, transportation costs and much more. Indirect costs are not directly related to the maintenance of the project, although they are also related to it, for example:
communication services;
rental payments;
payment for utilities and cleaning of the premises;
holding corporate events, gifts to employees for memorable dates, etc.
Obviously, it is direct costs that are the most important for maintaining the business in a normal state. They occupy a large share of the overall budget, and less money is spent on indirect (overhead) costs. Therefore, it is primarily possible to save on indirect, rather than direct costs.

Controllable and uncontrollable

Theoretically, an investor can influence the size of any expense, i.e. he can control all costs. But in practice, situations arise when certain types of expenses are not subject to direct control. For example, it is extremely important for a store to choose a specific location (in a shopping center, near a highway, in a densely populated neighborhood, etc.). Therefore, although theoretically there is always a choice of the amount that will be spent on rent, in this case the possibilities for making a decision are minimal.

On the other hand, if an investor invests money in the music business and rents a space for recording compositions, the location itself does not matter much, but certain requirements are imposed on the materials of the walls and ceilings to create normal acoustic conditions. Therefore, the same type of costs (rent) will be controllable in some cases, and uncontrollable in others.

Reimbursable and non-reimbursable

Reimbursable costs include those for which compensation is initially provided for by the contract. For example, a construction company is engaged in the construction of a new facility, and for this it will be necessary to send several employees to gain relevant experience. Then it can initially agree with the customer (investor) that these costs will be compensated in full.

In other cases, they talk about non-reimbursable costs. Obviously, such costs are always greater, because the main goal of investments is to make a profit, not compensation. Profit cannot be guaranteed, and compensation is always spelled out in the relevant contract.

Explicit and implicit (hidden)

Finally, one more criterion for classification can be identified. Most investment costs are explicit because the investor can foresee in advance what investments will be needed at a particular stage. These are the costs that are included in business plans - rent, wages, utilities, purchase of goods and much more.
However, there may also be situations when the cost is implicit, i.e. hidden. This means that it is impossible to foresee it initially due to:
lack of relevant knowledge;
the occurrence of force majeure circumstances.
Therefore, business plans always take into account the funds of the reserve fund, which should be at least about 100-200 thousand rubles. These funds are spent as needed and saved at least during the first year of the business's existence. In the future, when significant profits are received, the money can be invested in the development of the company. However, part of the funds still needs to be reserved.

Investment Cost Budget

Before opening a new company or creating a financial project, each investor draws up a detailed budget, which specifies expenses and income at each stage of development. There are several types of budgets, one of them is the investment cost budget. In the simplest case, this financial document contains a description of the investment size, as well as the expected income within a specified period. At the same time, the project reflects not only financial indicators, but also other parameters that also affect profit (number of customers, traffic, etc.).

In practice, when drawing up an investment project, first determine the full list of costs, the most important target indicators and the time frame for achieving them.

It is important for any investor to have a good idea of what investment costs are necessary to open, maintain and develop a specific project. Therefore, it is important to understand not only practical issues, but also to imagine the cost structure, i.e. studying the theory in this case is as necessary as accumulating personal experience.