What is a Capital Investment Decision?

Jim B.
Jim B.
Man climbing a rope
Man climbing a rope

A capital investment decision is a choice made by a company about how to invest the capital it has at its disposal. These investments are designed to grow businesses. These decisions can be as essential to the long-term success of a company as its ability to conduct business with its customers. Making a capital investment decision requires identifying company goals and establishing acceptable levels of risk. Capital can be invested with business expansion in mind or it can be used to reinforce current business operations.

Companies in the modern age usually cannot sustain business through sales alone. The profits earned from those sales, along with any other sources of cash flow to which the company might have access, must be used in a way that fortifies the business against its competition. Business owners have a vast array of choices when it comes to investing excess capital. When a business owner makes a capital investment decision, he must sift through all of these choices in an effort to find the perfect selection.

Business owners have many different options when making capital investment decisions. For example, a company can simply use excess capital to fortify the business it already has. It can do this by hiring new employees or ordering better equipment to replace machines that may be wearing down. A company can also strengthen its hold on its customer base by using the excess capital to sponsor a promotion that rewards loyal customers. Expansion may even come in the literal sense, which would require capital to be invested in new locations for business to be conducted, especially if a local business has larger aspirations.

In contrast to these visible improvements, a capital investment decision may deal with an intangible business improvement. Putting money into marketing strategies, either by conducting an aggressive advertising campaign or by building a highly functional and innovative website, can reward business owners with big investment returns. This type of capital investment has the potential to raise a business's profile, foot traffic, and sales.

Every capital investment decision should make sense in terms of the individual company's goals and its acceptable risk levels. When a company invests in something, there is always the chance that the investment won't be profitable. In addition, companies must realize that aggressively investing their capital means that they could end up with higher amounts of debt. When debt levels reach a certain point, a company may have to rein in their investments and keep excess capital in reserve.

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      Man climbing a rope