The first step in deciding whether to make a major purchase or take on a major project is to really sit down and think about what you're trying to accomplish. What are the benefits that will flow from your project? At this point, just focus on the benefits. Once you get a handle on those, you can look at the costs, and decide whether (or how) you can afford to carry out your plan.
Revenues and costs. In most cases, the types of benefits you'll be looking for are things that increase your revenues, or decrease your costs.
For example, let's say you're thinking of buying a truck, so your retail store can make deliveries. Will this pull in customers that don't already buy from you, or increase the level of purchases of your existing customers? If so, the purchase might be a good idea. However, it can also be a good idea if you've been offering deliveries for some time, but the truck you have has been costing you a fortune in repairs and maintenance and you think you can find a more reliable vehicle with better fuel mileage. In this case, you're not looking for a revenue increase — your goal is to lower your vehicle expenses.
Most business owners (and their financial advisors) are happiest when the benefit of a project is a revenue increase or an expense decrease, because these kind of gains can be quantified — the changes can be estimated in terms of dollars brought in or saved. Thus, you can do a formal financial analysis of the project that measures costs against benefits. Moreover, after the project is completed, you'll be able to measure the results in terms of dollars.
Less-tangible benefits. However, there are other kinds of benefits that can flow from your project, and that can also help your business, perhaps indirectly. For example, redesigning your logo or purchasing new signage can give you a more professional image, which may, in time, lead to better-heeled customers and more revenue. Carrying certain lines of products can strengthen your image with particular ethnic or religious groups, even if the products themselves are not big moneymakers. Depending on your business, these unquantifiable gains may be quite important to you, even if the net benefit is hard to measure or predict. Nevertheless, when you're faced with a choice between two competing projects, it's usually best to choose the one that has the greatest quantifiable benefits.
Sometimes a project will be needed to enable you to keep the level of business you already have. For example, a hair salon may need to replace furniture and redecorate, periodically, if it wants to keep up a fashionable image. Repairs and replacements of all types fall into this category. Benefits of these kinds of projects can sometimes be quantified by estimating the way your revenues would drop off over time if you did not make the change.
And finally, some projects are simply mandated by law (such as cleanup of certain environmental hazards, or upgrades to comply with building codes). Although there may be no incremental financial payoff, the project is needed to keep you in business, period. In such cases, there may be various ways of complying with the law (for example, several different ways of treating hazardous wastes) and your analysis of the benefits would focus on the pros and cons of several alternatives.
Tax incentives. Uncle Sam wants to encourage you to invest in your business, and offers a number of tax benefits for doing so. However, tax considerations should always take a back seat to the operational needs of your business.
Decide on the project's details. As you concentrate on the goals that you want the project to achieve, you'll begin to focus on the specifics of what you need — for example, the specific type, size, capacity, capabilities, etc. of a new business machine, or the square footage, construction, and location of a new facility. If the asset is something that must be customized or constructed for you, you'll have even more choices to make, including who should perform the work. At some point, you'll have fleshed out your requirements enough to take a look at what's on the market. You'll start talking to salespeople or even begin taking bids.
Concentrating on the benefits you wish to achieve helps you in another way: if it turns out the particular project is not financially feasible, you may be able to think of alternative ways of achieving the same results. For example, instead of buying a delivery truck, you might be able to hook up with an independent package delivery service that will deliver to your customers at a reduced rate. Paying the delivery service may be a cheaper way of accomplishing the goal you've set for yourself: increasing your sales to customers who need or want deliveries.
Keep in mind that the question of the business benefits you can achieve and
the detailed requirements of your intended purchase or project can change, as
you move on to evaluate
the costs. If the features you want are too expensive, you may have to
settle for less.