How to write a business plan for an investment project (development of an investment plan)

01/19/2016 19 212 2 Reading time: 12 min. Rating:

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: Konstantin Bely

Let's continue the conversation about investing and consider what an investment project . After reading this publication, you will learn what the essence of an investment project is, what it includes, what types of investment projects there are, why they are compiled and evaluated, and much more. I think, given the huge role of investment in the economy, everyone should have at least a certain understanding of this.

What is an investment project

In the most general classical definition, the concept of “investment project” (hereinafter referred to as IP) is a set of operations (financial, organizational, technical and personnel) concentrated on achieving a specific goal.

They require material (financial, capital and intellectual) investments or investments for their implementation. If to achieve this goal it is necessary to implement several investment projects, then a set of such projects united by a single goal is called an investment program, a multi-project.

Figure 1. Investments.

Participants and their functions

To implement the IP in practice, it will be necessary, in addition to the goals and desires of the investor, to involve a number of participants and specialists.

These may be the following participants:

customer or beneficiary of the individual entrepreneur. One who is directly interested in the benefits from the sale. This could be an individual, a corporation, a state, a city administration, or even a public organization;
an investor is someone who directly or indirectly finances an individual entrepreneur with his money, material or intellectual assets;
performer or contractor - an individual (group of individuals) or organization directly performing the work or technical specifications for translating the IP into reality;

Figure 2. Participants in the investment project.

a design organization, a consulting company is a group of individuals or companies that prepare IP, performing its calculations, technical justification, preparation of documentation, and legal support;
crewing or outsourcing company - fulfills the tasks of the individual entrepreneur in recruiting and training the necessary personnel;
credit institution - a bank through which credit financing of individual entrepreneurs is provided;
insurance company - provides insurance for both the entire investment project as a whole and its individual technological processes, the most risky operations, including insurance of market risks;
controlling, licensing and permitting state or municipal authorities. They constantly monitor the IP for its compliance with laws, standards and technological norms;
public organizations - play the role of a public auditor to ensure that the individual entrepreneur complies with environmental, moral and ethical standards.

Classification and types

Classification of investment projects can be carried out on a variety of grounds and criteria. There are different types of projects - financial, capital construction and even social. In Russian investment and business practice, the following classification of investments and projects is accepted.

General system classification of investment projects in the table.

Life cycle

Like any clearly described project, an investment plan has clearly defined implementation stages in time, which can be called its life cycle:

development of ideas and concepts
collection, description and structuring of information
presentation of the project to the investor
direct implementation
summing up (utilization of results or development of the next investment project)

A long-term, complex and responsible stage is the implementation stage. The success or failure of the entire project is determined by this period.

Contents of the investment project

IP, as a document intended for investors and other key investment participants, must answer the questions:

how profitable it is to invest money in this particular project;
how much is it;
how quickly the investment will pay off;
what investment resources are needed for this;
who will manage the process;
what are the risks and guarantees for investors.

The general scheme of an individual entrepreneur looks like a draft business plan:

Project summary or investment memorandum, which briefly summarizes all the main parameters of the individual entrepreneur
Marketing market research - whether the company’s products, its services, etc. will be in demand.
Technical justification for the project - what needs to be built and how, what equipment is required, where to purchase it.
Description of the entire organizational chart, individual entrepreneur management model, distribution of powers, management, personnel - their hiring and payment
The financial model of the entire individual entrepreneur - how the money will work, when the break-even point is passed, calculation of the main financial indicators.
Assessment of investment risks, methods of working with them, insurance, alternative options in cases of force majeure.
Applications, technical calculations, financial and legal information, recommendations of experts and analysts, which are necessary for investors to evaluate IP.

Definition of the concept

An investment plan is a document or a set of activities that involve investing in the expansion or modernization of a company’s activities, aimed at a specific effect defined over time.

Similar projects are drawn up for both large and small companies that are aimed at developing their activities. The economic meaning of investing is investing part of the profit as a foundation for its growth in the future.

The description of a project to invest in a company must necessarily include information about:

essence of innovations
new technology (production, sales, marketing, etc.)
calculations of required investments
economic effects
further development prospects

This document contains a business plan, but is a more complete and broader description of what and why the business spends money. Often it contains design estimates and other detailed materials describing the essence of the investment.

Stages of an investment project

The implementation algorithm for any investment project includes:

The idea of an individual entrepreneur, its search and development in specific terms, for example, to build a solar power plant for a cottage village.
Studying ways to implement an investment project - build it yourself, hire a contractor or buy a ready-made turnkey station.
Search for financing, for example, choosing the option of purchasing a finished station and installing it on site. Accordingly, the optimal methods of financing may be either collecting money from village residents or obtaining a loan from a bank.
Preparation of documentation, obtaining permits, legal support, searching for a contractor.
Project implementation.
Receiving profit from invested funds. In this case, in the form of saving electricity bills and subsequently supplying it to neighboring utility consumers, a neighboring village.
Final assessment of the effectiveness of investments.

Figure 3. Scheme of the investment project implementation algorithm.

Examples of investment plans

My friends became the owners of an electrode production plant. First there was an investment plan, for which the bank issued a loan with deferred payment (loans for business are considered on individual terms).

At the same time, the guys agreed with the owner of the plant on financial leasing (lease with the right to buy at the residual value). It took two years to become full owners.

Another example of a successful investment plan is natural dairy products. Full cycle:

number of cows;
mini-workshop;
sales of products.

It is noteworthy that the money was issued by the state. A grant (free subsidy) was received for the investment project.

Another example. My good friends have opened a small hotel and are engaged in “green tourism”. Initially, they relied on authenticity. Household items from the 15th to 18th centuries were combined very successfully.

We placed our bets on daily master classes:

how to milk a cow;
how to make cheese;
how to bake bread (they teach everything: from malt sourdough, hand grinding on a millstone to lighting the oven, planting a loaf);
how to make pottery.

Add here hiking, horseback riding, round dancing around the fire, fishing, apiary. And people are coming. In the summer we organized a camp for children, and in the winter – a ski school. But we started with a half-abandoned house in the village, the money for the investment project was a bank loan.

How to draw up an investment project

To draw up an IP, you must adhere to the order: from the initial idea to summing up the final results - whether the project was a success or not.

Figure 4. Investment project support process.

Idea generation

Idea generation involves:

copying a ready-made investment idea with adaptation to conditions, this could be, for example, buying a franchise;
searching for ideas during a brainstorming session between project participants and invited specialists;
working with experts and analysts who are professionally versed in specific issues, markets or assets;
search for ideas during a competition for the best way to solve a problem.

Risk assessment

Risk management methods are used to assess investment risks:

compiling a rating of all possible risks of an individual entrepreneur;
expert risk assessment, for example, with the involvement of specialists from an insurance company, which will provide insurance at all stages of its implementation;
studying and drawing up scenarios for the development of events;
Conducting stress tests of the project, modeling its resistance to certain negative factors.

Preparation and approval of the project

This stage involves putting together all the components of the investment project - preparing it in the form of an investment memorandum, business plan, project documentation, legal registration, obtaining licenses.

For example, this could be holding an initial meeting of shareholders of the company that will implement the IP and approving an investment program at it. To prepare the project, both the company’s own specialists and invited experts, auditors, representatives of government agencies and credit organizations are involved.

Implementation of the idea

At this stage, the final implementation of the project is carried out according to a pre-drawn schedule, monitoring and auditing of each intermediate stage is carried out, and reporting is compiled. If necessary, changes are agreed with key partners and contractors.

Presentation of a business plan to an investor

Any, even the most detailed and effective investment plan requires proper presentation. The main purpose of the demonstration is to present the idea in a favorable light for investors, increasing their involvement and interest in the project.

#GALLERY#

Preparing for the presentation

A presentation requires careful preparation from the speaker:

the information component should be formulated in the form of short abstracts and not take much time;
The cost of a business plan
and the visual component influence the final decision, so all slides should be designed in a simple, discreet and, most importantly, uniform style;
speech should be confident and unemotional.

IMPORTANT! The audience's attention should be focused on numbers and calculations - they facilitate perception.

The success of a startup depends 80% on how it was presented to the interested public. The ability to present and highlight an idea in a profitable manner plays a key role in the subsequent development of a business.

How do investors evaluate an investment project?

Since a business plan for an investor can be aimed at different funding bodies, it is evaluated differently. Typically, performance analysis proceeds as follows:

the structure of the enterprise is studied;
the content of the documentation is assessed;
methodological principles are applied;
operational approaches are used.

All investors pay attention to correctness, consistency and complexity in drawing up a business plan.

Mathematical assessment of an investment project

To assess how well an individual entrepreneur meets investors’ expectations and what real prospects it has in terms of profitability, there are methods for quantitatively assessing investment parameters. In practice, both complex mathematical models and a set of simple mathematical algorithms (formulas) are used, with the help of which the main indicators of profitability can be determined.

Internal rate of return

This mathematical coefficient shows how much the individual entrepreneur is able to generate profit, taking into account the discount rate or credit interest rate.

If the index is greater than 1, it is generally accepted that the individual entrepreneur produces more profit than what you have to pay for the loan and it is higher than the inflation rate.

D1 — discount rate corresponding to NPV1 (positive net income);

D2 is the discount rate corresponding to NPV2 (negative net income).

Payback period

The payback period can be calculated by two main methods.

The first (simplest) is to divide the amount of the initial investment by the amount of annual income that the individual entrepreneur will bring. The payback period is calculated in years or months.

The second method is to calculate the payback period taking into account the discount rate or credit interest (inflation) using the formula.

Where,

n is the number of periods;

CFt is the inflow of funds for period t;

r—discount factor;

Io is the size of the initial investments in the zero period.

The main advantage of the method is that it takes into account inflation risks at the design stage.

Liquidity

Liquidity of an individual entrepreneur is the period during which an investor or owner of an investment project can convert assets into cash. Simply put, how quickly you can sell objects or assets on the market and get money for it. Liquidity is calculated by the period required to sell an individual entrepreneur on the market.

Figure 5. Investment project calculation.

Calculation of economic efficiency

Economic efficiency is calculated using various return on investment indices.

The simplest option is a profitability index based on the project’s cash flow:

PI = ∑NCF/I

Where:

PI - return on investment index;

NCF (net cash flow) - discounted cash flows;

I - investment.

An example of using the formula in practice:
1.5 million rubles were invested in the project. The return that the investor expects to receive is RUB 4,500,000.
Then PI = 4.5 / 1.5 = 3.0.
Profitability is 3.0, above zero, therefore, the individual entrepreneur will not be unprofitable. In general, the project is recommended for investment.

By implementation time

Depending on the length of the planning horizon, there are:

short-term plans (usually up to 12 months)
medium-term projects (for a period of 1 to 5 years)
long-term investments (more than 5 years)

For example, in a medium-term project for 3 years, the main volume of investments falls on the 1st year of implementation, and the return should be planned only by the end of 3 years and even later.

External assessment of the investment project

Performance assessment is carried out by the project owner, key partners, and external contractors. This may be a circle of individuals or companies that are directly interested in the implementation of the project, state or municipal authorities, the public, shareholders or third-party investors.

Analysis of the attractiveness of the project for the investor himself

When making calculations, the investor is guided by the economic efficiency indicators of the project where he is investing his money, and by a number of factors that make this project attractive. These, in particular, may be:

long-term and promising investments;
the novelty of the idea used;
stability or predictability of the market environment;
ease of project management;
low risks;
performing a socially significant task.

Such parameters are assessed through expert consultations.

Assessing niche prospects

The implementation of any individual entrepreneur is designed to meet the needs of the market and customer demand. To assess the market niche, marketing research and sociological surveys are used. This is necessary so that the project investor knows exactly how much what he will do, produce, sell is necessary for consumers and society.

Working with direct competitors

The implementation of an investment project in a market economy, with rare exceptions, involves interaction with direct competitors.

For these purposes the following can be used:

direct competition through price dumping in order to capture market share;
work on the quality line, when the individual entrepreneur is able to offer more advanced products compared to competitors;
entering the market with a fundamentally new product;
reducing costs and increasing the efficiency of individual entrepreneurs, which makes it possible to maintain its niche in the market.

How will the company make a profit?

In order for an individual entrepreneur to achieve his goal, the investor must have a clear understanding of exactly what the profit will be from:

sales of products or services as they enter the market;
generating income through consulting services if the IP was successfully implemented;
receiving associated profits not directly related to the individual entrepreneur.

By area of activity

This classification characteristic reflects the area in which changes occur due to the activities included in the investment project:

industrial, if there is a restructuring of the processes of production of goods and provision of services
organizational, if business processes in the company are revised
social, if the goal is to reduce costs through the social sphere
marketing, if investments are made in the field of sales and promotion of the company’s products

In addition, the scope of activity may reflect the facet of entrepreneurial activity on which development is being emphasized:

construction of new facilities (buildings, structures, factories, infrastructure, etc.)
asset purchase
production of goods and services
modernization of existing technologies
repurposing or developing new markets
introduction of innovative ideas
development of digital directions

Lending

In practice, it is rare that any individual entrepreneur is financed solely by the investor’s financial resources. Loans are used to finance projects. These loan schemes may vary.

Investment lending for individual entrepreneurs

Resources that have investment status can be attracted for financing:

funds of third-party or external investors on the basis of their direct participation in the capital of the enterprise;
funds of public investors attracted during the placement of share capital through the stock exchange;
receiving government grants for participation in socially significant investment programs with the support of federal executive authorities or regional governments;
funds accumulated by enterprises themselves for the development of their internal investment programs.

Project financing

Project financing of an investment project involves two main types of funds raised:

credit financing, including the use of project credit lines;
financing through state or municipal investment programs that have important social and economic significance for a particular territory.

Construction lending

Financing of capital construction projects, including investments in development projects, is carried out in three options:

At the expense of the money of the future residents of the complex through mortgage lending. This is the so-called shared investment construction.
Construction at the expense of finance, attracted funds from external investors.
At the expense of funds allocated under state or municipal programs. For example, programs for the construction of social housing adopted in most regions of the Russian Federation.

Risks when working with investment projects

A profitable investment in an individual entrepreneur always involves risk. This is an axiom of a market economy. Typical risks are:

force majeure risks are acts of force majeure that can neither be predicted nor fully compensated (natural disasters, man-made disasters and military conflicts);
technological risks associated with the imperfection of the technologies and equipment used;
market risks associated with the fact that the goods and services of the individual entrepreneur do not meet the needs of the market and are not in demand;
credit risks are the inability, for some reason, of an individual entrepreneur to generate a sufficient amount of profit that can compensate for the money borrowed; Human factor risk - incompetence of personnel, lack of professionalism of management;
political risks - tightening of tax legislation, strict control of business by the state, corruption of officials, change of political regime with confiscation of investors' assets.

Each of the risks has features that, when developing and implementing an IP, must be taken into account in the investment program or memorandum.