CS Professional Financial Management CAPITAL BUDGETING
CS Professional video lectures : Capital budgeting refers to long-term planning for proposed capital outlays and their financing. Capital budgeting include includes both short term and long term planning of capital and also about their utilization. For example, if we are buying a machinery or building we will calculate the total cash inflow and cash outflow and then determine whether it is affordable to invest in machinery or not.
CAPITAL BUDGETING PROCESS
IDENTIFY AND EVALUATE POTENTIAL OPPORTUNITIES
The first part of capital budgeting is to identify all possible proposals and then considered what will be best for business. Mere identification is not sufficient we have to decide the criteria for deciding the proposals and also establishes well-defined guidelines so that no redundant proposals or idea get passed through any stage. After evaluating all proposals we should see what makes the most financial and logistical sense.
ESTABLISHING THE CRITERIA
Before identifying the criteria we have to establish the criteria according to which we will establish our proposals. We have to see whether criteria is economical to a business need or not. In many cases, we work on noneconomic criteria like competition, risk, and legal requirements. We should establish the criteria according to our organization need.
After getting all the proposals, we should evaluate which proposal will be best for our business. If there is any conflicting proposal which is not feasible should be immediately rejected. If there is any idea which is copied or same should be coordinated and only original should be considered.
ESTIMATING ALL COST RELATED TO PROPOSALS
Cost plays a major role in deciding proposals. We have to decide whether our project is for short term or long term. With the help of capital budgeting, we will be able to decide which investment is worthy for our risk and poor investment decision should be immediately rejected. If we are going for long-term investment we should also consider any additional amount required for replacement of any part or machinery. The proposal should be flexible so that any change in cost wouldn’t affect the entire project. There is also the need to match capital budgeting with other budgeting activities so that there is no misbalance.
Assessing risk is a critical part of the capital budgeting process. We have to assess the risk while the project is still in process. If there is any variation from the established standard it should be immediately reported so that any variation can be controlled. Once a degree of risk is determined, the company can evaluate its result against its estimated cash flow or benefit to see if it makes sense to pursue implementation or it is better to drop the idea.
IMPLEMENTATION AND FOLLOW UP
Proper implementation plan should be established so that there shouldn’t be any confusion regarding it. Follow up audit should be carried out to know whether the desired result is achieved or not. If there is any deviation what is the possible reason for it. Audit personnel should be thoroughly guided with the criteria so that they can carry out the audit.
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