Throwing Good Money after Bad?

It was recently reported that business investment is starting to pick up in the U.S.  Although this is a welcome economic signal, at the individual company level you need to make sure your investments make sense.  How much analysis do you put into investment decisions?  Once you make a decision, do you monitor the spending and results to make sure the outcome will be what you anticipated when you made the commitment? Do you do a “post-mortem” review of significant projects to understand the real return and learn from mistakes so they are not repeated? What constitutes a good investment in your company?  Do you evaluate a project in terms of “risk-adjusted” returns, knowing that the more inherent risk, the higher the returns need to be?

Unfortunately, many investment decisions go bad and result in destroying company value.  Were they doomed from the start or did they go bad because of insufficient or poor project management? We need to do our homework before committing funds.  Are we confident there really is an addressable market to justify the investment?  Are we sure we have all the costs identified and understand how they might increase if there are changes to the project?  Do we have milestones for project reviews to make sure the project is on time and budget?  Have we stress tested the financial assumptions and do we know how far off our assumptions can be before they result in poor project economics?  All of these things must be fully understood if we are to create value in a company.  In addition to fully understanding the costs/benefits of a project and managing them well, we should also examine projects from a rigorous financial perspective.  For smaller projects, simple payback analysis may be sufficient.  For more important and larger projects, one should use Net Present Value (NPV) and Internal Rate of Return (IRR) computations to make sure the project is evaluated in a way that helps create enterprise value.   

Oftentimes it takes an objective view to see a project clearly.  Some projects achieve a life of their own.  Internal company politics, face-saving considerations, ego or other things may lead to a bad project which continues to waste cash when there is no way it will ever pay back what you expected.  Sometimes it may be better to kill a project rather than continue to throw good money after bad.  Don’t let your projects achieve a life of their own.  You need an objective view without internal cloud. 

B2B CFO© is the largest firm in the U.S. providing emerging and middle-market companies CFO services, including project evaluation and management.  We will provide objective and honest input into your investment projects and help you manage them through to a happy conclusion.