The FD Consultant can assist you in negotiating with clients and contractors.

Investment appraisal

An introduction to investment appraisal

Investment appraisal is the process used to determine whether spending money on an item, such as new equipment, a marketing campaign, or business expansion. Basically, is the spending worthwhile?

Appraisal helps a business assess whether an investment will generate more value or profit than it costs.

The FD Consultant can assist you in negotiating with clients and contractors, as well as in building relationships with banks to secure debt facilities if necessary.

Our appraisal process employs various techniques to analyse financial data and budgeting.

Investment appraisal methods and techniques

Payback period

The payback period is the time required for an investment to recoup its initial costs through net cash inflows. It is straightforward to understand, making it particularly useful for businesses with limited cash flow. However, the Payback Period method of appraisal has some limitations: it does not account for cash flows beyond the payback period and ignores the time value of money.

Accounting Rate of Return (ARR)

Accounting Rate of Return measures the average accounting profit from an investment as a percentage of the initial investment. It is easy to calculate using accounting figures and shows how profitable the investment is. However, it has limitations. It ignores cash flows and the time value of money.

Net Present Value (NPV)

Discounting future cash flows to their present value and subtracting the initial investment provides a way to assess investment opportunities. The NPV method is considered reliable because it considers both risk (through the discount rate) and the time value of money. However, Net Present Value has limitations as it requires estimating future cash flows and choosing a suitable discount rate, which can be subjective.

Internal Rate of Return (IRR)

The discount rate is the percentage at which the net present value (NPV) of an investment is zero. This rate helps compare different projects by showing their expected returns. However, it can be challenging to use with projects that have unusual cash flows, and it might provide more than one answer.

Profitability Index (PI)

Ratio of the present value of future cash inflows to the initial investment. Useful for ranking and comparing projects, especially when capital is limited. The limitations are that, like NPV, it depends heavily on estimates and the discount rate.

Finance directors often use a combination of these investment appraisal methods. For example, NPV and IRR for strategic investments, and Payback Period for quick operational decisions, where cash flow risk is the biggest concern.

Here at The FD Consultant, we use our skills and knowledge to determine which investment appraisal is best for your organisation's project or investment.

How The FD Consultant helps investment appraisal

We focus on the financial implications of the decisions you make in the company. We help you understand what other terms should be considered from a financial perspective.

Simple questions to ask in a lease contract could be:

What does a rent-free period of six months actually mean in practice?
How long will you be tied to the lease?
What do terms like “putting everything back into good order” entail?
Does that mean you need to set aside funds for those kinds of obligations?

How The FD Consultant helps tender evaluation

When it comes to tender evaluation, if you’re pitching to a significant client and want to make an attractive offer, we need to consider the implications for your business. What’s the bottom line? If you’re offering various incentives, are they financially viable?

Often, the desire to secure a large contract leads business owners to offer incentives that they ultimately can’t deliver, and we can help identify and mitigate that risk. We’ve mentioned cost analysis, which overlaps with the accounting side.

We explore two scenarios where commercial investment appraisal would be particularly useful.

Example one - investment

Negotiating a contract to secure a lease for new business premises.

A growing marketing agency needs to move into larger offices to accommodate its expanding team. The landlord is offering a 5-year lease for £60,000 each year. At first glance, this appears manageable, but it is essential to carefully review the financial implications.

Financial implications to consider are

The fixed commitment

A lease locks the business into long-term payments, regardless of how the business performs. £60,000 per year is £300,000 over the lease term, a significant liability.

Initial costs

Renovations, furniture, IT infrastructure, and branding may add another £50,000 upfront. These are often overlooked but must be taken into account.

Operating costs beyond rent

Service charges, business rates, insurance, utilities, cleaning, and maintenance could add £20,000–£30,000 per year. Suddenly, the annual cost isn’t £60,000 — it’s closer to £90,000.

Cash flow impact

Rent is usually payable quarterly in advance, creating a lump-sum outflow. If income is uneven, this could strain working capital.

Opportunity cost

Could the business achieve the same outcome with flexible coworking or shorter-term serviced office space? Locking into a long lease may reduce agility.

Risk and flexibility

What happens if the business contracts instead of grows? Early exit penalties or inability to sublet could turn the lease into a burden.

Example two - project

Tendering for a contract

A construction company is thinking about bidding for a project worth £500,000. At first glance, it seems like a good way to make money. However, if the company doesn’t carefully evaluate the project, it could end up losing money instead.

Financial implications to consider:

Direct costs

Labour, materials, subcontractors, and equipment hire. If these add up to £480,000, that leaves only £20,000 profit before overheads.

Overheads & hidden costs

Site management, insurance, compliance, tender preparation costs, and admin. These could easily absorb another £25,000, turning the project into a loss-maker.

Cash flow timing

Even if the project is profitable on paper, will the client pay on time? Delays in payments mean the firm may need to borrow working capital to cover wages and suppliers, incurring financing costs.

Opportunity cost

Could the team be tied up on this low-margin contract instead of taking on more profitable work? Tendering itself also costs time and money that could be directed elsewhere.

Risk and contingencies

Price fluctuations in materials (e.g., steel, fuel).
Potential penalties for late delivery.
Unexpected changes in project scope.

You can see how business decisions must always start from a financial point of view, and The FD Consultant is here to help.

Debt facilities

Many growing businesses reach a stage where additional funding is needed — whether to manage working capital, invest in expansion, or smooth out cash flow.

One common route is to secure a debt facility such as a loan, overdraft, or revolving credit line.

The FD Consultant specialises in debt fundraising, which involves securing loans rather than raising equity.

Banks require thorough consideration and analysis before agreeing to finance such loans with interest, and this relationship is where our assistance comes in.

Deals necessitate the preparation of detailed legal documents, typically spanning 40 to 50 pages, based on comprehensive financial modelling.

But negotiating and structuring the right debt facility isn’t always straightforward, and that’s where The FD Consultant really adds value. Here’s how we’d start to secure a debt facility.

Assess the need

We start by reviewing your cash flow forecasts and business plans. A review clarifies the amount of funding genuinely needed and whether short- or long-term debt is more appropriate. We can then assess whether debt is the right option compared to alternatives such as equity investment, invoice discounting and asset finance.

Prepare the business case

Lenders want confidence that the money will be repaid. We help you produce clear, reliable financial models, enabling you to demonstrate repayment capacity through accurate cash flow projections. We’ll highlight business strengths that reduce the lender’s risk, making the transaction much more attractive for them.

Negotiate terms

When we enter into negotiation, we can compare interest rates, covenants, and fees, and negotiate repayment schedules that align with your cash flow cycle. We must ensure the facility is flexible enough to support growth rather than restrict it.

Managing ongoing compliance

Once funding is secured, we don’t step back; we continue to provide oversight to ensure that covenant reporting is accurate and timely, that debt levels remain sustainable and that future funding requirements are planned in advance, avoiding last-minute pressure.

With the guidance of a finance director, you can confidently approach lenders. You’ll know that your business case is strong and your financial plan is solid.

At The FD Consultant, we view loans as more than just a means to obtain money; we consider them essential tools for growth. The right loan structure can help your business grow, while the wrong one can cause problems. Our job is to ensure that debt helps your business, not hinders it.

Finance is central to every business

We understand that engaging with a client allows us to make a significant impact. We write this confidently, as we truly believe we excel in our field. The consultants at The FD Consultant are highly trained and dedicated to delivering exceptional service.

Finance is at the core of every business, as all activities ultimately relate to financial considerations. In this context, we can be likened to the hub of a wagon wheel, with each spoke representing a different department within the organisation.

FAQs on investment appraisal

1. What is an investment appraisal?

An investment appraisal is a way to evaluate whether a potential investment, such as new equipment, technology, or a business expansion, is worth the money. It helps decision-makers understand the expected costs, returns, and risks before they spend any money.

2. Why is investment appraisal necessary?

Investment appraisal helps businesses decide where to put their money. It ensures that funds are allocated to projects that deliver the best financial returns, support long-term goals, and maintain cash flow. In short, it reduces uncertainty and builds confidence in important decisions.

3. What methods are used in investment appraisal?

Standard methods that provide a clear view of financial impact and risk include:

Payback Period: The time it takes to recover the initial investment.
Average Rate of Return (ARR): This compares expected profits to costs.
Net Present Value (NPV): This measures the total value of future cash flows, taking into account time and risk.
Internal Rate of Return (IRR): The rate of return that makes the investment worthwhile.

4. Who carries out investment appraisals?

A finance manager, a finance business partner, or an external financial consultant typically does investment appraisals. They collaborate with operational managers to collect data, create forecasts, and analyse the results. This process ensures that decisions are based on accurate and realistic numbers.

5. How can a finance company help with investment appraisals?

We help businesses make wise investment decisions. Our team analyses costs, forecasts returns, and creates different scenarios. We explain the financial impact in simple terms. This way, you can clearly see your options and choose investments that align with your goals and deliver long-term benefits.