This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
It has been noted above that it is comparatively easy to calculate, before an enterprise is started, how much of an investment will be required in order to provide plant, machinery, and other fixed capital. This statement is true, assuming that the enterprise is simple and unified, and that the promoters and managers know exactly what they intend to do.
Unfortunately this last condition does not always exist. It is a common occurrence to find that a company which was started to manufacture a given line of goods, gradually engages in the manufacture of something entirely different. Or it may continue to manufacture a given line but discover that some new process is required. Again, after a company has once developed its own special business successfully, its managers almost invariably begin to thirst for fresh conquests and begin to take on "side lines." Or, yet again, the managers of a company which has proved successful may decide to make use of the surplus that is accumulating for their own purposes instead of distributing it to the stockholders, and may build up a large account under the head of "investments".
In figuring the requirements for fixed capital, therefore, we have to consider not only the original plant and equipment which must be obtained in order to bring the business into existence, but also later acquisitions or developments along any one of the following lines:
1. Extensions of the original plant.
2. Increases or changes in equipment.
3. Adoption of side lines.
4. Outside investments.
It is in connection with subsequent changes or developments along these lines that most of the opportunities for mistakes and miscalculations in the investment of capital in fixed forms arise.