Principles of investment policy
The investment activities of the company - a set of practical actions to make investments according to the chosen investment policy. The main subject of investment activity in this case is the same company that acts as an investor and decide on their investments, borrowed and borrowed property and intellectual property in investment objects.
Most cases are combined into one initiator of investment (investment idea generator), an investor and a customer (user) of the investment object. In addition, participants are investment lenders, investment intermediaries, contractors and others.
In developing the investment policy of the company must take into account the legal and economic preconditions for investment funds.
The legal prerequisites for investment include the investor to choose the right direction, type and scope of investment activities on your own system to form a contractual relationship with any members of investment activity.
Among the prerequisites for economic investment should emphasize the need to compensate investors not using available funds for current consumption, providing rewards for risk and investment required compensation for losses.
Development of investment policy of the company is based on the concepts of financial management:
1. The concept of cash flow is based on the recognition of assets as a source of future cash flows and provides:
- Identification of the cash flows from investment in individual assets;
- Assessment of impacts on the size and structure of future cash flows from the investment;
- The choice of the discount factor, which makes it possible to compare the cash flow generated at various stages of the investment process;
- Assessment of the risks associated with cash flows.
2. The concept of present value stems from the objectively existing nerivnotsinnosti current and expected cash resources due to inflation, the risk of loss of profits, slowing the turnover of funds.
3. The concept of compromise between risk and profitability into account that an increase in the level of expected return on investment while increasing the risk of a shortfall in revenue. The most common practice in financial management to solve the problem of optimal combination of risk and return, although in certain periods can be addressed to maximize investment returns or minimizing investment risks.
4. The concept of cost of capital requires taking into account the value of individual investment resources to ensure their most optimal structure for the criterion of minimizing the weighted average cost of capital.
5. The concept of efficiency of the capital market is that with timely and adequate information security market prices of financial instruments match their internal (real) value. Based on this concept, financial managers can rely on market prices of financial instruments, justifying the need for their inclusion in the investment portfolio.
6. The concept of asymmetric information takes into account the fact that some members of the investment may have confidential information and use it when making investment decisions.
7. The concept of alternative costs based on the need to take into account the opportunity costs of the investor when he chooses a direction of investment and refuses to alternative investment options.
8. The concept of agency contracts requires deliberately go for additional agency costs when the investment intermediaries know best investment market conditions and can more effectively manage the investment portfolio than the investor.
The main objective of the investment policy is to ensure the most effective ways to increase assets. For its implementation within the financial management of a range of tasks solved:
- Achieving high rates of capital growth and current income from investments (at certain stages of the investment process can treat the task of maintaining the invested capital);
- Minimizing investment risks using methods and techniques of risk management;
- Liquidity investments by substituting investment projects, investing only in highly liquid financial instruments.
Development of investment policy begins with the study of the external investment environment and forecasting of investment market conditions. Based on these results and with the basic strategic objectives of economic development of the company, determine the strategic direction of its investment.
The intensity of the investment process and investment priorities of the company largely depends on the stage of its life cycle.
Thus, the development stage enterprises invested substantial initial investment in the formation of its material and technical base. After entering production facilities in operation increases the need for investment to create stocks of raw materials, finished goods, work in progress. At the same time a lot of money should be spent on the implementation of a set of active marketing activities.
Where the company has reached a stable production and sales, it can be a significant part of their profits to reinvest in financial instruments in order to obtain additional income. At this stage of enterprise development priority of its investment activity is the formation of a diversified investment portfolio. And when the company almost completely exhausted its resource development through initial investments, growing demand for investment resources for the modernization of production, trade and regional diversification. Timely investment priorities change allows the company to avoid decay and dissolution.
Strategy investment company largely determines its strategy of forming investment resources.
The common funding scheme investment company is to cover initial investment by the share or equity capital and long-term loans and meet working capital requirements due to additional short-term and medium-term bank loans.
In real investment volume of investment resources depends on the size of investment projects, while investing in financial instruments - the volume of available surplus funds investor. To meet the investment needs of the enterprise may involve financial resources from internal and external sources (Fig. 8.4).
The main methods of financing investments include:
• Full self-financing involves investing exclusively from its own internal sources. But due to limited domestic financial resources, this method has a limited scope and is used to implement small investment projects, as well as financial investment.
• Funding provides large-scale involvement of external financial resources by issuing shares. Typically, this method of investment financing is used for large-scale modernization of production capacities of regional and commodity diversification. In some cases, when the market price of credit is very high, it is advisable to increase the share of the share capital by issuing additional shares.
• debt financing used in investing capital in investment properties with high profitability and rapid return on investment. Due to long-term bank loans are usually covered part of the initial investment. For profitable businesses, as repayment of principal is postponed to the stage of operation. Short-term bank loans attracted for creating inventories, and trade credit providers allow enterprises to accelerate the financial cycle and reduce the overall need for investment capital.
• Leasing (operational, financial, compensation) is used in cases where their own financial resources for the acquisition of fixed assets is not enough or when it comes to investments in projects with low life cycle and high turnover of technology.
Often in practice, no one method of financing and combination of different ways. Such financing is called mixed.
Recently emerging economies gained widespread method of project financing.
This is one way of debt financing in which the reality of the cash flows provided by identifying and distribution of the whole complex of project-related risk between the parties (contractors, financial institutions, creditors, government agencies, suppliers of raw materials, finished products consumers) and others. Depending on what proportion of risk assumes the lender, there are three forms of project financing, with full recourse to the borrower without any recourse, limited recourse. During regression understand the requirement to repay the borrowed money.
In developing the strategy for investment financing is important not just to identify possible sources and methods of funding, but also to ensure the optimal structure of investment resources.
In substantiation of optimum structure of investment resources must be based on the following requirements:
- Complete synchronization proceeds with the investment needs of the company (this means that in any period should be no shortage of investment resources);
- Ensuring the efficient use of investment resources (there should be no unused funds, and if there is a temporary excess free cash flow, they need to invest in highly liquid financial instruments);
- The need to reduce the total average cost of capital involved in the investment project.
For these failure criteria of the company-investor may have serious problems, slowdown of construction works due to lack of funds at the production stage; the need to attract additional loans at high interest; reduction of supply and underutilization of available production capacity during operation; low efficiency investments at high average price of invested capital, and others.
In terms of constant variability of environmental factors for timely adjustment of investment processes need to constantly monitor investment. The main areas of control by the financial manager include:
- Formation of investment resources and their timely placement in investment assets;
- Implementation of individual stages of the project;
- The current efficiency investments;
- Operational management of the investment portfolio and others.
If in the process of monitoring the investment processes reveals the impossibility of normalization with the help of administrative measures, a decision on the "output" of the investment program. This can be done by:
• failure of the implementation of the project before the start of construction works;
• sale of uncompleted construction to attract additional equity or equity in order to reduce the investor's share;
• the sale of certain assets or the entire facility investment as integral property complex.
In the case of investments in financial instruments similar "solution" can be done by converting timely financial instruments in monetary assets in order to minimize further loss of financial investors.