Investment department is concerned with decisions of funds investment (already invested / to be invested) by the organisation in other businesses. While we are discussing Investment department, we will discuss about Long-term investment.
There are other times when funds are available for short periods only. We have discussed the same in “Treasury (working capital management) function” separately.
The department monitors the progress of existing investments that there are safe and would yield regular returns in future.
Similarly, the department conducts research into the operations of prospects to identify organisations which can provide better returns / better financial gains on desired investment alongwith safety.
Why department required in on Organisation? Or Why not invest in organisation’s existing business instead of outside investment?
- Investment in existing business = expansion of existing capacities OR backward or forward integration → these are long-tem decisions based upon market outlook, market survey, forecasting, etc.;
- Existing business may have limitation in terms of:
- Saturation in growth ;
- Maturity of product life-cycle;
- Evolution of new / competing technologies risking the existing business model.
- Unless organisation vigilant about surrounding developments → organisation business model may turn redundant;
- Exploring business opportunities is a basic need of the organisation and can’t be avoided;
- There is a need for building businesses and generating cash flows either by increasing turnover or cutting down costs rather than generating periodical returns by investing in short to medium-term investments in shares, stocks, debt instruments, interest-bearing loans & advances;
- Organisation’s need to build vendors → continuity of raw material flow / services of good quality (Large organisations develop vendors by investing in vendors’ businesses both financially and building processes) → Investment department identifies the right vendors;
- Organisation’s need to build customers → promotion of organisation’s products (existing / new)
Inorganic growth vs. business set-up
- Inorganic growth = purchase of existing organisation by making payments to controlling investors;
- Business / project set-up time and its stabilisation = 3 – 4 years rigorous period;
- Advantages of business purchase:
- Saving of project set-up time;
- Immediate acquisition of knowledge bank of existing processes and resource pool (i.e. manpower; location advantage; customer base, etc.);
- Availability of existing market immediately rather than future prospects, which may not be available;
While we are discussing about investment decisions, Warren Buffet and his approach of “value investing” can’t be ignored.
He has always talked about investment in businesses rather than looking for short-term advantages. Short-term may undervalue the worth of an organisation, but fundamentals remain a major criterion. The importance of entrepreneur and his / her decision making ability, business model, power of resources can’t be ignored while investing in a business.
It’s worth :
Deliverables (i.e. expectations from the Department)
- Advising better investment opportunities;
- Safety of existing investments – ensuring proper documentation, periodical review of its worth;
- Safety of returns – ensuring regular receipt of returns once the same becomes due.
Important developments in the Investment function
- Availability of lot of information about an organisation in public domain due to
- Evolution of internet as an information ocean;
- Disclosure requirements of Companies Act, Stock Exchanges, other stakeholders.
- Availability of third-party research databases providing corporate information and data-mining capabilities.
Conflicts (Inter-departmental) / Challenges with Investment function
- Investment in long-term businesses → benefits / returns may take longer time than expected → mismatch in cash flow (investment > returns for initial period);
- Investment in other businesses / other management decisions → requires regular monitoring for impact analysis of these decisions → investment turning into bad if monitoring missed.
Some of the Process Implementation for better Investment function
- Less process requirements since the department deals with long-term investments;
- Status of proposals under consideration; status of proposals;
- Activity calendar showing income / principal becoming due for receipt / redemption;
- Checklist of criterion / documents / agreements for investment analysis and investment closure.