Research and Development Definition
Research and Development is an actual pre-planned investigation with the expectation of gaining new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading etc. resulting in a business advantage.
Many countries have specific guidelines and accounting standards for implementation of research and development. R&D’s cost is debited in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. as an expense/capitalized in the relevant assets (depends upon nature of R&D) of that period in which they incurred. Its cost once written off can’t be reinstated.
Types of R&D (Research and Development)
There are three types of R&D.
#1 – Basic Research
Research of this objective is to get complete knowledge and understanding of one special subject, not a practical situation. This research is also called as pure or fundamental research. Basic research is a theoretical approach to any subject.
#2 – Applied Research
Research of this objective is to get complete knowledge and understanding of one special subject in a practical situation. This research is an inverse of basic research. This research is formulated to solve a practical problem.
#3 – Development Research
This Research is a combination of applied and basic research. This research will be implemented after getting knowledge and understanding of a specific task/subject from the basic and applied research.
- R&D has increased the productivity of goods and services manufactured/traded/supplied by an entity.
- It has increased the income or profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. of an entity after analysis of costing such as manufacturing/selling/general expenses which expenses can be reduced to a certain level so that income or profitability can be increased.
- Governments of some countries motivate to industries/entities for Research and development of their goods and supplies and also provide taxes benefitsTaxes BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place..
- Positive Research and development (R&D) is increased the goodwill of an entity’s product and services.
- Gained new knowledge and understanding from research and development, an entity can start a new business plan and find some opportunity.
- The company can increase the business volumes in the market after research of the present market scenario basis what are the expecting customers from the goods and services provided by the company. This will increase the revenue and profitability of the company.
- If the company wants to borrow money then before providing documents to the lender, management should analysis the lender’s profile, future forecasting about changes in the rate of interestRate Of InterestAn interest rate formula is used to calculate loan repayment amounts as well as interest earned on fixed deposits, mutual funds, and other investments. It is also used to calculate credit card interest., which country’s economy impacting to the lender’s business, etc. and after gained all the relevant knowledge and understanding.
- Positive R&D outcomes can increase the long term benefits on investments of the entity.
- An entity can use available human resources at an optimum level.
- It can control the risk such as Operational RiskOperational RiskOperational risk is the business uncertainty a company comes across in the industry while executing its everyday business operations. Such risks arise due to internal system breakdown, technical issues, external factors, managerial problems, human errors or information gap. , Management Risk, Financial riskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy. and investing risk after analysis of the relevant vertical scenario.
- Research and development have increased the cost of the company. Its outcomes can be positive and negative.
- Separate Manpower to be hired by the entity for doing R&D and this will increase the cost of the company.
- It is a very difficult process and highly experienced and well – qualified manpower is required to do the research and development (R&D).
- It can produce artificial outcomes.
- Failure in R&D will not be increased in sales volume and revenue as well.
- Whether an Entity gets positive or negative outcomes Product cost to be increased by the R&D cost and increases in product prices can be decreased in sales volume.
Limitation of Research and Development
- Outcomes/findings/results of research and development can be positive or negative and artificial too.
- Selection of the type of R&D is very difficult until human resource can’t understand the current market scenario.
- Company cost will be incurredCost Will Be IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. on all type of R&D whether its outcomes are positive or negative.
- The risk involved in these projects and the company should have sufficient budget to exposure the risk and timelines set by the team.
- Sometimes research and development can be terminated in the mid because of changes in the political scenario, new competitors in the market or declined in the prices.
Important Points about R&D
- The objective is to obtain new scientific and technical knowledge and understanding.
- The entity should have a plan, budget, stipulated time and manpower to complete the research and development on time.
- If Entity gets positive outcomes then they should patent it so that future economic benefits can be achieved.
- The entity should hire highly experienced and well–qualified manpower to fulfil the requirement and can get positive outcomes.
- An entity should purchase the latest machinery technology for doing research and development.
- It requires upfront sufficient budget to do the research and development.
- Negative outcomes can decrease the goodwill/brand image/reputation in the market.
- The market is very volatile and some manpower should be used to know the updated changes of the market so that entity can change the quality of the product, costing, designing as per updated changes.
- An entity should fix its product prices after verifying that market price, quality of the similar product in the market otherwise the company will get loss of sales volume, revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions., and profitability.
This has been a guide to what is Research and Development (R&D) and its definition. Here we discuss the 3 types of R&D along with the advantages and disadvantages. You can learn more from the following articles –