Advantage of investment planning and feasibility is making investment controllable in line with goals and raising success ratio as high as possible. Unexpected factors may always take the investment out of the goals; however, this possibility is distinguishably low for an investment of which feasibility is done well. In addition, an investment made without researching all dynamics both comes up against the possibility of wasting resources, and may land other investments and enterprises of the investor, if any, in the event that it comes to grief.
When a new investor or existing enterprise desires to enter a new business or invest in a new facility, the main goal is to gain profit, namely revenue. Period of profit expectation may vary; profitability may be aimed sometimes after 1 year, sometimes after 5 years, and 10 years according to the area of investment and project; however, whatever relevant aim is, final aim is to obtain more and more revenue all the time. Therefore, use of right ways to achieve this aim, especially minimizing risks on the final result for big investments which cannot be sacrificed requires a good planning and feasibility study.
Investment planning are important for countries, as well as companies and investors. Especially economic resources of developing countries for investment, namely for establishing new facilities are limited. Therefore, these limited resources must be used extremely by planning and in the rightful way. Instead of putting resources at risk for an investment which is unlikely to achieve aimed results, directing these resources to areas which have always possibility to be realized is a better approach.
What lies behind correct usage of resources is planning and feasibility. Size of investment is a factor increasing the importance of planning and feasibility. Today, there are consultancy companies which are only engaged in feasibility studies in order to support investors and enterprises in these issues, that is because the value and importance of the matter.
INVESTMENT PLANNING, FEASIBILITY AND PURPOSE
What is investment planning and feasibility? Investment planning is defined in many references as investing capitals or monetary resources in suitable investment instruments based on future goals, time horizon and priorities of the investor. At the point where we handle the topic, this investment instrument is a new facility. Therefore, reviewing needs of the enterprise to make the investment by considering its goals and determining certain physical needs of the facility to be established according to these needs, such as location, machinery, equipment, building-construction and laboratory, and financial aspects based on years in detail is a part of investment planning.
Feasibility is a term we mostly use both consciously and unconsciously. Word meaning of feasibility is “practicability” and it is an instrument used for investment planning. Main goal of feasibility is to review investment aimed from the ground up and determine its practicability.
For example; you plan to establish a facility by thinking you will be able to get benefit from it in the future. Before starting spending your money to establish this facility, you must determine whether this facility is worth investing and to which extent the facility is profitable. For this, you must determine all the factors which may be important for the project and be evaluated. Studies done for this evaluation are defined as feasibility study or feasibility analysis. In consequence of evaluation, investments found profitable are called as “feasible”.
Feasibility study may also be done to expand, restore existing facilities, as well as for a decision for a new investment.
As understood from definitions above, the real aim of planning and feasibility to prevent misevaluation of existing resources and reduce risks in investments.
KEY ELEMENTS IN PLANNING AND FEASIBILITY STUDY
Feasibility must include all inseparable processes for an enterprise. These processes may be collected and evaluated under 5 main titles.
1. Market Investigation: Aim of market investigation is to evaluate type, features, possible sales price of product or service planned to be produced, in which markets or market segments they will be sold, how much money they will be sold in, sales periods, financial benefits such as export, employment and added value.
In milling industry, target market is considerably important during market investigation. Diversity of product to be produced must be determined by regarding target market or markets. For example; an enterprise aiming to export flour must determine consumption habits in target country, product features especially required by public authorities for exportation, and sales prices of the flour type in that market.
2. Investigation of Location: While investigating the location of the facility, it is required to determine a location to reduce costs of the enterprise in terms of economic and social aspects, and gain favor in many aspects. To that end, the most rational establishment location is tried to be found considering raw material, energy, work force, closeness to the market, subject conditions, transportation facilities, development potential and many other factors for the investment to be made.
When locations of flour mills in the world are reviewed, it is seen that a considerable part of them is located in regions where wheat is produced or in regions which are suitable for transportation such as ports. Such regions provide important advantages for mills.
Therefore, closeness to raw material should be absolutely considered while choosing location if it is planned to invest in a new facility related to milling. Regions where there are licensed silos may especially be advantageous. Closeness to the market is another important matter. If the facility has a plan for export, logistic network should be evaluated well. Regions where there are railway, sea or channel transportations are substantially important for enterprises planning to make exportation. Other elements such as subsidiary industry, industrial workers, workmanship cost, human resources, competition, transportation, land, energy and incentive are among elements to be considered during determination of the facility location.
3. Financial Investigation: In this section of the feasibility study, matters such as total cost of investment, structure of fixed and variable expenses, needs of enterprise capital, cash flows and financing program by months and years, cash flows after passing to production, par production amount and breakeven time of the investment are evaluated.
Financial investigation is a must for a profitable facility. While investment cost is calculated in financial investigation, study and project expenses, patent, license, royalty and know-how expenses, land price, land arrangement and preparation, building and construction expenses, machinery and equipment expenses, storage, transportation, insurance, mounting expenses, vehicle expenses, trial production expenses, general expenses, unexpected expenses, and interest rates in investment period if credit is used must be considered. In addition, putting the facility into service also brings many new expense items such as raw materials, personnel, fuel, energy, water, spare parts, maintenance-repair expenses, sales expenses, taxes, logistic expenses. These expenses should be considered while determining the capital of the company. Other items such as payment terms in sales, cash needs during production should also be considered. All these investment costs and expenses should be calculated monthly and annually in detail. Otherwise, defaults may occur in determining real cost of the investment and capital need of the enterprise, and this case may complicate target achievement.
4. Technological Investigation: In this section, matters such as techniques and technologies to be used in production and alternative production techniques and raw material and auxiliary product needs to arise according to each technique, machinery and equipment required for these and input-output analysis, layout plan, how construction and mounting works will be performed, supply resources, number and features of the personnel to be employed.
In a facility feasibility regarding milling, the first matter to be considered in terms of technological review is diversity of products to be produced and capacity. It is another important matter whether production is based on 24 hours of shift, or normal operating shifts. Matters such as automation, spare part and service, maintenance costs should also be considered, needed technologies should be determined under these elements.
5. Legal Investigation: Laws, regulations and legislations to be followed from the stage of preparing the investment project to choosing establishment location, realization of investment, putting the facility into service and marketing goods are evaluated in terms of possible impacts and advantages on the investment.
If the result of feasibility study consisting of mainly these sections is positive (practicable), a preliminary project may be prepared for the investment. This project the becomes a final project and is put into service.
TRUE INVESTMENT PLANNING AND BENEFITS
Determining the key elements mentioned above under a feasibility study is very beneficial for a true planning. Prof. Dr. Mustafa Bayram, the Dean of Faculty of Engineering of Gaziantep University, explained the main principle in investment and feasibility in his research titled “Investment Planning and Analysis in Grain (Flour) Facilities” as “You cannot control what you cannot measure, manage what you cannot control, and success in a business you cannot manage is completely a coincidence”.
In other words, advantage planning is making investment controllable in line with goals and raising success ratio as high as possible. Unexpected factors may always take the investment out of the goals; however, this possibility is distinguishably low for an investment of which feasibility is done well. In addition, an investment made without researching all dynamics both comes up against the possibility of wasting resources, and may land other investments and enterprises of the investor, if any, in the event that it comes to grief. Any professional company cannot take the risk of failing in facility investments of serious numbers.
FACTORS AFFECTING INVESTMENT AND PRODUCTION COSTS
Stating that an acceptable investment is “profit-oriented”, Prof. Dr. Mustafa BAYRAM lists the factors affecting investment and production costs especially in milling facilities most as follows:
Brand, country, origin, used material, brand-new or used machinery preference
Price changes in equipment and costs (periodical)
Machinery amortization evaluation method, salary policy, advertisement and other expense items, accounting
Production Time and Production Capacity:
Production time and capacity usage rate affect costs. It should be determined according to supply and demand status.
Limitations, changes and government policies, country status, country perception affect prices.
Rate, Material Prices:
DETERMINING EXPENSE ITEMS FOR CAPITAL
Before determining investment capital, factors affecting investment and production cost mentioned above should be considered and suitable preferences should be made. Prof. Dr. Mustafa Bayram summarizes some titles to be handled regarding capital and investment costs during feasibility study after mentioned factors with their balances as follows;
Net Profit = Total Revenue – Total Expense
Capital = Beginning of Investment + Expenses + Raw Material + Workmanship + Equipment + Land + Loop
Total Investment Capital = Fixed Investment Capital + Capitalization
– Fixed Investment Capital = Building + Equipment
– Capitalization = Salaries + Raw Material + Reserved Product + Payments + Package, etc. (Money Circulation-Loop)
Cost of Investment in Industrial Facilities = Investment Capital Fee + Production Cost + General Expenses (Including Taxes)
1. Fixed Investment Capital: Fixed capital investment for production + Non-production fixed capital investment
Direct and indirect costs should be taken into consideration while forming fixed investment capital. Elements determining these costs are as follows:
1. Machinery purchase
2. Installation of machinery purchased
3. Equipment and control parts
5. Power line, transformer, panels and equipment
6. Building and project designing (building, operation building, administrative offices, laboratory, etc)
7. Land organizing
8. Transportation vehicles and waste systems
9. Auxiliary facility investment (vapor, water, cooling)
11. Insurance and taxes during investment period
1. Engineering and consultancy expenses
2. Unexpected expenses
3. Contracting fees
4. Other expenses during installation
Capitalization representing the total money required during the operation of the enterprise is determined by taking following elements into consideration:
1. Raw material purchase and stocking cost fee
2. Final product stocking cost fee
3. Cost fee for keeping semi-products on lines
4. Active balances
5. Cash (salary, travel expenses, daily wage, raw material purchase, auxiliary material purchase, etc.)
6. Cash for account payments
7. Cash for tax payments