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What is a capital investment? It means spending money on an asset for your organization that comes with a high price tag. Common examples are buildings and high-priced equipment. If you operate a business, capital investing is one thing that you can do to reinvest your profits in your business. During a recession, businesses often cut back or eliminate capital spending because of economic uncertainty.
Capital Investment
According to InvestorWords.com (IW), the technical answer is that capital investing is spending capital on a capital or fixed asset.
Capital Asset
IW defines a capital asset as “tangible property which cannot easily be converted into cash and which is usually held for a long period.”
Fixed Asset
IW defines a fixed asset as “a long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year.” Furniture is also an example of a fixed asset.
Benefits of Capital Investing in a Recession
If your business is doing well in the recession or an economic slump, you might be able to take advantage of the market for the long-term benefit of your business. One idea is to invest in expanding the production capacity of your business. For some businesses, this means hiring more employees, leasing more space, or buying more equipment. Depending on your business, capital investing can mean many things.
In “Businomics,” Dr. William B. Conerly recommends the following: “Opportunities during recessions include locking in favorable pricing through long-term supply contracts and purchasing additional capacity from competitors.”
What does this fancy advice mean for you, the non-economist? First, if prices for services or supplies drop during the recession, you can do what Conerly recommends and establish long-term agreements with suppliers. This “favorable pricing” is really just holding a supplier to a price even after the economy improves. A good supplier will want to keep your business, but you should keep in mind that future market conditions may cause this price to be renegotiated.
Second, you can take advantage of the disadvantages of competitors in your market. If competitors are suffering from the adverse conditions of the recession, you can think about buying their business or their assets. In the case of tangible assets, you can consider buying up property and equipment from companies needing cash. In the case of human resources, why not hire away their workers who already have the skills that you need in your business?
When you look at investing your capital during the recession, the buzz words are caution and discretion. You don't want to spend so much that you deplete your reserves. You do want to take advantage of lower prices and the weaknesses of competitors.
Be smart in spending your money. The choices you make will affect your business in the future. These decisions may mean the difference between slow and quick growth after the recession is over. Smart businesses employ smart investment strategies.
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