How to say no to an investment proposal

 

The investment project under study normally represents high investment cost and with long-term nature. |The process of study involves several parties with regard to gathering necessary information in order to develop reliable and reasonable assumptions to be used in running the financial model. 

The result of the study will show the calculated return on investment for the decision-making by the authorised persons. For instance, the investment can be installing a new production line to serve the increased demand for existing products, launching a new product, opening a new boutique, and so on.

However, no matter how well the study is made, the project still can fail or not give the expected return because of either unexpected factors after implementation or the poor quality of the estimates used. 

The following are some reasons a project should have been rejected right away.

ท Unrealistic revenue assumption. The study of a project will be based on projected profit and loss over future years, which may range from three to five years for small projects. Revenue estimate is important information that must be based on reasonable and realistic study. The growth rate needs to be used with caution. Otherwise revenue expectations can be exaggerated and not represent an achievable target.

ท Underestimated or incomplete expense assumption. The expense items for a project are significant information that determines the profit or loss of the project. Therefore, it is necessary to review all expense items to ensure the amount to be used reflects the true picture of the operating costs, especially those with conditions in related agreements. 

ท High investment cost. For certain projects, high investment cost can cause the project not to be feasible. The responsible persons have to try to negotiate with stakeholders where possible to reduce the investment cost. Several projects may get approval with underestimated construction costs. This can be a risk for the project when the cost is overrun during the construction period.

ท Lack of competent personnel. To run a big project, the structure and team members must be ready. This group of people must have suitable knowledge and be able to work together to execute the business plan once the project is started. Without the right team, it will be hard for a project to become successful. 

The above factors are just some of many that should be taken into consideration before agreeing to the new investment proposal. The company should not let the group-think effect to cause the wrong decision. After detailed review and questioning, the responsible people have to accept the project based on reliable information. Even if this is against the optimistic viewpoint, it is important for today’s management to dare to say “no” to any proposed projects without reliable information. 

 

Dr Yanyong Thammatucharee is head of international finance and operation at Central Marketing Group. He can be reached at [email protected].