Financial Systems

Appropriate Investment in Non-Current Assets

 
What Does Appropriate Investment Mean?

Appropriate investment in non-current assets means investing sufficiently to ensure competitiveness with other businesses but not over investing to the point where cash flows become limited resulting in unsustainable share issues or debt financing.

 

Signs of Under-Investment

 

Not Utilising New Technology

If a business is not utilising new technology then it's competitors will have an advantage in terms of higher productivity and lower costs of production, allowing them to further advance in cost leadership.

 

High Cost of Maintenance and Repairs

A business might be under-investing if existing plant and equipment has been worn to the extent it requires regular maintenance and repairs. New plant and equipment could bring productivity benefits as well as a reduction in maintenance and repair expenses.

 

Not Utilising Government Grants or Tax Deductions for New Asset Purchases

The government provides a lot of incentives for businesses to invest. A business may be under-investing in non-current assets if it is not taking full advantage of generous incentives. At the time of writing, the government allows small businesses to claim an immediate deduction on their tax of asset purchases up to the value of $20,000. (Source: ATO)

 

Signs of Over-Investment

High Levels of Debt

The business could have financed large capital purchases on credit, resulting in unsustainable interest repayments that cannot be met by its operating cash flows.

 

Unsustainable Share Capital

The business could have financed large capital purchases using additional share issues, resulting in lower dividends for shareholders. 

 

Selling of Other Business Assets

A sign of over-investment is the extent to which a business will have to sell other assets to finance the capital purchase as the business has insufficient savings. Of course, this exempts the proceeds from an existing asset that a new capital would replace.

 

Useful Links
  • Australian Tax Office - Instant asset threshold increase to $20,000 now law

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