Capital budgeting is the process that involves planning for long-term investment for the organization to procure new plants, machinery and produce new products. In this process capital is allocated for major expenditure or investment of the organization. The primary aim of these investments is to increase the organizations value to the stakeholders. As part of the process, the inflow and outflow of cash of the organization are assessed so that it meets the projected target. This process is also known as investment appraisal. In an ideal situation, organizations need to utilize different opportunities to boost their value, but often due to the non-availability of funds or due to the limited availability the organization needs to adopt the techniques of capital budgeting to introduce projects that will yield high benefits.
Nature of capital budgeting
An important part of this process is to set criteria regarding the projects that need funding and investments to enhance their value. It is also important to determine the type of finance that each of these projects require. Each of the projects that are undertaken by the organization requires different types of investment. Choosing of the projects, investments, all depend on the management of the organization and their regulations. It is also important for each of these projects to be financed appropriately. The projects can be financed through bank loans, debt capitals and bonds. Organizations can also utilize equity capital for financing these projects.
Factors influencing this process
There are a number of factors that influence the capital budgeting and few of these are the regulations of the government, taxation policy, funds available for the initiative, capital return, earning of the organization, policies of lending of the organization, the actual value of the new project, the prevailing trend in earning profit, the expected risk in the business, working capital, practices of accounting of the organization and also the market’s forecast.
Few important features
The best part of capital budgeting is that you can anticipate huge profits though there is some amount of risk is involved in this process. An important feature of this process is that there is a huge gap in between the initial investment and the ultimate return at the end of the process. This is considered to one of the most important decision for any organization. A host of advantages is attached to this process and the most important being it helps in defining the future investment of the company and also projects that can yield remarkable yield.
Facilitates decision making process
These decisions are crucial for the destiny of the organization, especially decision related to investments. The business managers utilize the method to correlate the earning of the business with the investment. It also serves as a tool for financial planning for the organizations. The actual utility of this process is to rank various projects that can yield high profits. The high ranking projects can obtain finances from a number of lenders be it the tradition lending bodies or the organizations that specialize in various forms of funding as the lawsuit loans or loans for specific purposes.
Techniques of this process
Few of the popular techniques if capital budgeting is Net Present Value, Discounted Cash Flow, Payback Period and the Internal Rate of Return. There has been a constant debate regarding the benefits of these techniques and also which one is a feasible over the other. Flexibility and consistency is an important attribute of this process that lures the corporates to opt for the same. The opportunities and the investment of the organization depend on the policies of the organization. This also helps the long-term influence on the development of the business. However, often the small businesses refrain from using the techniques.
Author Bio: Jennifer Turner has availed lawsuit loans recently. He is the owner of organizations that intend to expand through new projects. He had opted capital budgeting for the same.