The difference between investment and costs

For many of us out there who have had the opportunity to learn or to work on accounting, this is something that is quite obvious. Yet, over the past years we have noticed that many entrepreneurs who have not had any experience with management or accounting tend to confuse these two concepts when doing their feasibility analysis for the first time. As a result, they end up stating costs that should be deemed as investment and vice versa. So, what is the difference?

Investment

The investment is the expenditure that a company (or an individual) does in long-term productive assets. Examples:

  • Machinery
  • Building and facilities
  • Intellectual property (patents, brands)
  • Software

Hence, investment expenditures are usually non-recurrent and the assets that the company acquires are long-lasting. An investment in creating productive capacity in factory will not be needed to be done again for as long those assets last.

Costs

Costs are expenses that the company must incur on a regular a basis. It includes the consumables of a manufacturing process, the services that it acquires from third parties, the costs with human resources, taxes and fees.

In very simple terms, the investment is the car that one buys to go from one place to another. The fuel, insurance and maintenance are the costs that one person needs to incur to get the car running properly.

In your feasibility analysis

If you are unexperienced with feasibility analysis it can be easy to confuse and end up putting investment as costs or costs as investment. Be careful about not getting it wrong as the outcome can be different from reality.

Example

You are making a business plan. Your investment items are 6.000 EUR. Your estimated yearly costs are 4.000 EUR. Your expected yearly revenue is 8.000 EUR. If you put investment and costs together and the addition of those items is 10.000 EUR. You would reach the conclusion that your net profit is -2.000 EUR.

Year 1 Year 2 Year 3 Year 4
Revenue 8.000 8.000 8.000 8.000
Investment and costs together 10.000 10.000 10.000 10.000
Net profit -2.000 -2.000 -2.000 -2.000

That conclusion is incorrect. The correct analysis is:

Year 1 Year 2 Year 3 Year 4
Revenue 8.000 8.000 8.000 8.000
Costs 4.000 4.000 4.000 4.000
Net profit 4.000 4.000 4.000 4.000

And the investment would be only 6.000 in the first year. More while on the first case it seems you would always be losing money, on the following the investment would be recovered by the mid-second year (as the accumulated net profit would around 8.000 by the end of the second year).

So, while doing your feasibility analysis be sure to not mix costs and investment. CASFLOAPP helps you out as the forms to state costs are clearly separated from the investment.