Understanding Investment Time Horizons for Better Business Budgeting

Jump to the transcript of this video here.

IN THIS ARTICLE

→  Why Time Horizons Matter in Investment
→ Immediate Impact Investments for Short-Term Goal
→ Long-Term Investments for Sustainable Growth
→ Setting Expectations and Evaluating Impact
→ Practical Steps for Effective Budgeting
→ Brendan Mills: “Selling soon? Why timing is everything for informed investment decisions”
→ Final Takeaway

Understanding Time Horizons in Business Investments

As we approach the midpoint of the year, many Australian businesses begin their budgeting processes. This is particularly crucial as they operate on a financial year from July to June. This period often brings up many questions, particularly about the time horizons of investments. Understanding how these horizons affect investment decisions can significantly influence a business's financial health, especially for those considering selling in the near future.

Why Time Horizons Matter in Investment

The concept of time horizons in investment refers to the period over which an investment is expected to yield returns. This can vary greatly depending on the business’s goals. For instance, a business planning to sell within a few years will have a vastly different approach compared to one planning to operate long-term.

Immediate Impact Investments for Short-Term Goals

For businesses looking to sell soon, any investment must have an immediate impact. Consider this scenario: a company plans a $100,000 marketing campaign. If the expected return on investment (ROI) isn't realised until two or three years later, it might be prudent to rethink this investment for the next financial year. The focus should be on investments that offer quick returns to boost the business's attractiveness to potential buyers.

Long-Term Investments for Sustainable Growth

Conversely, businesses with no plans to sell soon can afford to make long-term investments. These might not show immediate returns but are expected to significantly benefit the company in the future. For example, investing $100,000 in a project today might result in losses in the first year but could yield substantial gains in years three, four, and five. This approach requires a different time horizon and a strong understanding of long-term benefits.

Setting Expectations and Evaluating Impact

Setting clear expectations around investments is crucial. Businesses need to evaluate the potential impact of their investments, whether they plan to sell or continue operating. This involves a detailed analysis of each expense, from accounting and advertising to wages. For example:

• Insurance: Often a fixed cost where finding the best deal can save money without altering business operations.
• Occupancy costs: Moving locations can be a significant change but might be necessary for reducing costs or increasing efficiency.
• Wages and purchases: These areas can be influenced by improving employee performance and optimising procurement processes.

Practical Steps for Effective Budgeting

Regardless of the business’s future plans, understanding the impact of investments is essential. Here are some practical steps:

• Assess investment impact: Determine whether the investment will have a short-term or long-term impact.
• Set clear expectations: Define the expected outcomes of investments and ensure they align with business goals.
• Evaluate major expenses: Regularly review profit and loss statements to identify areas for cost-saving or improvement.
• Performance metrics: Implement performance-based metrics for employees to ensure high ROI.

Final Takeaway

Understanding the time horizon of investments is vital for effective budgeting and financial planning. Whether a business is planning to sell or continue operating long-term, aligning investments with their strategic goals is essential. By setting clear expectations and evaluating the impact of investments, businesses can ensure financial stability and growth.

From the Founder: “Selling soon? Why timing is everything for informed investment decisions”

→ Return to video here

“We’re approaching the midpoint of the calendar year, and in many places like Australia, this is when many businesses do their budgeting, as their financial year runs from July to June. This budgeting process often leads to many questions.

One of the topics I wanted to discuss in today’s video is how to consider the time horizons of your investments. I was inspired by a recent conversation where someone said to me, “We want to do our budgeting process for the 2025 financial year, but our goal is to sell our business within the next two to three years.” I responded, "I’m glad you shared that information before we started budgeting, as it changes the reference points for your budget.”

If you are planning to sell, your business and budget mindset will be vastly different from someone with no intention of selling and who plans to continue operating the business long-term.

There’s one clear difference: If you are looking to sell your business, any investment needs to have an immediate impact.

For example, if I’m planning a marketing campaign or some sort of training or consulting, and there’s a $100,000 investment, but we won’t see a return until year two or three, we might need to reconsider that investment for the next financial year if we are looking to sell.

Conversely, if your plan involves a long-term horizon, investing $100,000 today with the expectation of losses in year one but significant gains in years three, four and five would be a smart move. But this requires a different time horizon.

So, if you are looking at selling your business, you may need to cut costs – or at least keep them steady. Evaluate the impact of your investments carefully. If an investment today will have an impact tomorrow, definitely go for it. But if you want to do something today with the potential impact not realised for 12 to 18 months – and with no guarantees – I would reconsider making that investment.

When planning to sell, the brutal reality is that many expenses cannot be changed without fundamentally altering the nature of your business.

For instance, review your profit and loss statement line-by-line from A to Z – from accounting and advertising, all the way down to wages.

Certain expenses, like insurance, are set and forget – find the best deal and move on. Others, like occupancy costs, may require significant changes, such as moving locations. Wages and purchases, especially in manufacturing or a buy-and-sell business, are areas you can influence. Then, consider your people. Assess your employees’ level of performance and the return on investment they provide. These are the big drivers for the ongoing success of your business, impact on financial performance, and – if you’re considering it – the sale value of your business.

Regardless of whether you are looking to sell your business or keep it within your family for years, always consider the impact of your investments.

For example, if hiring someone for your sales team worth $100Kpa, ensure their expected impact is clearly defined and possibly included in their employment contract. What’s the amount of sales they are expected to generate over the next 12 months, plus over the foreseeable future?

Get a strong understanding of the investment, its impact, and the time horizon between those two elements. And if it's an individual or an advisor, set those expectations clearly from the start. That ensures any changes you make in your business have the most impact for the next financial year and beyond.”

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