Investments within a company can be very beneficial, but often they come with big risks. How to figure out whether it is worth investing money in the company’s project?
What to consider when investing in an internal project
Internal projects are projects that are executed for the needs of the company, for example, for the development of the organization, and are not related to the requirements of external customers. It is necessary to make a decision on investing in internal projects in a balanced manner in order to avoid possible problems. Here are the factors that will help you understand whether it is worth spending resources on the project:
1. Cost-effectiveness of the project
This is the most obvious, but at the same time the most important factor that determines the cost of the project and the expected result. The process of evaluating an internal project is similar to that of any other investment project. However, the main feature of an internal project is that it may require non-monetary investments, such as labor.
The economic effect of the project can be indirect if it cannot be calculated directly. In such cases, the cost-effectiveness assessment will be more subjective and based on an approximate estimate of the benefit to the company.
One example of such a project may be the introduction of an automated system. Even though it does not directly generate revenue, it can seriously simplify operations and increase the efficiency of the company. However, it is necessary to take into account the costs of implementing the system and possible losses in the main activities of the company.
In large companies, the economic effect is easier to express in money by transferring the employee’s saved time to work in rubles. However, the average business can only evaluate the results of the project approximately, relying on improving working conditions.
To calculate easily the cost effectiveness of a project, use this formula: result = effect/cost. If the result is more than 1, then it is worth investing in the project, if less than 1 – it is not worth investing.
2. Project timeline
For the project to be completed, the company needs to consider carefully the timing of the project. This way the company will be able to anticipate the possible risks that may arise during the work. For example, if the project must be completed as soon as possible, then the company may face a lack of resources or overload of personnel.
The timing of the project can vary greatly depending on the scope of the task, its complexity and available resources. For example, a team of 1-2 specialists can perform the project, or you can involve 10 specialists or a consulting company with an almost unlimited resource.
However, in general, the optimal period for the implementation of the project is from 6 to 12 months. At the same time, projects that drag on for a longer period often face problems associated with changes in market conditions and technological changes. Therefore, when planning the timing of the project, it is better to focus on this period, but also take into account seasonality and changes in the economic and political situation.
3. Project profitability
Profitability is a measure that expresses the relationship between profit and revenue. The profitability of the project allows you to determine how much money will be earned on the project, its assessment requires deep analysis. Internal projects often involve pre-existing processes and limited company resources, so their profitability directly affects overall profitability. Because of this, assessing the profitability of internal projects can be more difficult than external projects, since the company needs to take into account not only project costs, but also possible changes in the work of other departments and processes. For example, if an internal project requires a large amount of resources from other departments, then this can lead to delays in other projects and reduce the overall profitability of the company.
To calculate the profitability of an internal project, you can convert all costs and benefits of the project to a cash equivalent. This will help compare the project with other investment opportunities and decide on its feasibility.
4. Improving Company Competitiveness
One of the main indicators that the internal project can increase the competitiveness of the company is its compliance with the strategic goals of the company’s development. A 2019 study by PwC showed that companies that actively implement digital technologies and processes have higher productivity and respond faster to market changes, which leads to an increase in the company’s revenue.
It is important to take into account technological trends and changes in the market so that the project is relevant and effective. For example, today many companies are actively introducing AI, blockchain and other innovative technologies to increase the efficiency of business processes.
It is also important for the head of the company to take into account the opinion of the company’s employees about the new project. If they are interested in its implementation and offer valuable ideas and solutions, then this will help improve the project and achieve high results. To do this, the head of the company must create an open and friendly atmosphere in which each employee will have the opportunity to express his opinion and will be sure that it will be taken into account when making decisions. Otherwise, there is a high risk of sabotage and rejection of the project results.
What to do if the result of the project did not meet expectations
One option may be to use the results of the project partially, despite its low performance. In this case, the head of the company needs to analyze the project costs and assess how justified these costs are.
Another option may be to invest further in the project in order to reach its results up to 100 percent. However, it is important to assess the additional financing of the project not from the position “how much has already been spent,” but “how much more is to be spent.” It is necessary to avoid a trap when it seems that if we twist the project a little more, then everything will work out. If at some point there is no progress, then you need to stop the project and write off the costs.
It is always difficult to make a decision to close the project, but it is necessary to see the “red indicators” on the radar in a timely manner and stop work on the project. The reason for the closure may be because the effect has not been achieved, the deadlines and budget have been exceeded, the market conditions have changed and the need for a project has disappeared.
Tips for prioritizing when investing in an internal project
1. Identify the most important process
Some processes can be critical to the company, and their imperfection can lead to serious problems. For example, this can be a process that leads to the inability to meet customer needs, price increases, or lengthening the production cycle.
2. Prioritize customer-centric processes
Customers are the main source of income for any company, so priority should be given to processes that affect customers the most. This can be the process of serving customers or the process of producing goods that are in greatest demand among customers.
3. Choose processes that can be improved at the lowest cost
Improving your business processes can be costly, so you should choose the processes that will get the most out of them at the lowest cost. For example, if the automation process requires a large financial investment, then it is better to choose a production optimization process that will require less costs to implement changes and save the company more time and resources.
By Sergey Sundukov, CFO, Brickitapp