The Capital Budgeting

A number of factors combine to make decisions about capital decisions, perhaps the most important financial managers and their employees must do. There are a huge number of variables that need to be considered although many can be defined as readable because of their probability of emergence. However, the cost of failure is great with companies that face bankruptcy if their market rights are very wrong. The report focuses on assessing the major risks that affect the cost-cutting decisions and how this information can assist the methods used to analyze investments in fixed assets.

Firstly, because the conclusion of decisions on capital appreciation affects many years, the company will lose its flexibility. For example, the acquisition of the property with ten years of economic life ends for a ten-year period. Furthermore, due to the fact that asset growth is fundamentally linked to expecting the sale of the future, the decision to buy a property that is expected to complete ten years requires a ten-year sales plan. If the company invests too much in assets, it will lead to unnecessary high depreciation and other expenses. On the other hand, if it is not enough to spend on fixed assets, two problems can arise. "In the first place, its equipment can not be efficient enough for low cost production, and secondly, if it is insufficient, it may lose part of its market share to competitors and recover lost customers will entail high sales costs and price reductions, both as Are expensive ". If a company predicts its needs for capital value in advance, it will have the opportunity to purchase and install the assets before they are necessary. Unfortunately, many companies do not order capital goods until existing properties are approaching full-capacity usage. If sales grow due to increased general market demand, all companies in the industry will tend to order capital goods at the same time. This leads to "monitoring, long waiting times for machines and an increase in their prices". A company that anticipates its needs and buys assets during a relaxed period can prevent these problems. The budget usually involves significant expenses and before a company can carry a lot of money, it must have funds available – a large amount of money is not available automatically. Thus, companies considering a large financial plan should plan their funding far enough to make sure that funding is available.

Key issues that deal with budget budget decisions made in financial management policy, This sets the tone for all future financial decisions.

Contains tax insurance interests but not dividends and bankruptcy costs lead to the processing of theory of capital structure. Some debts are desirable because of the tax protection resulting from interest income, but the cost of bankruptcy and financial distress limits the amount to be used. This is because when companies are heavily delivered, the risk of default risk is high. Therefore, it is necessary to approve the most appropriate financial management strategy.

This is an extremely important concept for companies to consider when commitments are made for capital decisions, as their financial plans will have a major impact on determining which investment option to pursue. For example, if the company decides to follow investment reasons, the discount rate is high in the latter stages of the project, although the initial value of payouts is high. If the company is heavily funded with debt then the risk of that task will be high due to the likely default risk that occurs in the short term in the future, causing uncertain events that are uncertain. Recent examples of this issue are described below:

Recent crisis in the football industry has shown the importance of keeping close control of the company's finances. As the industry became increasingly profitable in 1990, many clubs operated under the terms of trade. To cope with increased spending in parallel with placement and wage increases, the club borrowed too much to keep the industry out of business. This was revealed in May 2002 when the sudden fall of ITV Digital posed a threat to bankruptcy for many smaller clubs. This situation was because smaller clubs had played their future over the amount of money they received from ITV Digital. Investment decisions on capital have been based on short-term expenditures, so football clubs can neglect their long-term survival and because over six hundred bosses were made over the summer to reduce costs.

For example, highly profitable semiconductor companies in the mid-1980s, like Samsung, did not change their decision making budgeting decisions towards higher debt levels, as commercial technology points out. This can be explained by the fact that, at high technology rates, current assets are best described as risky and intangible. Therefore, borrowing seems to be foolish, as in times of crisis, the company's existing assets would be worthless, which means that nothing is possible to protect against invalid arrears. However, this seems a little pessimistic in terms of prosperity, but the expected expansion and growth, although there are many other risk factors that need to be considered when making capital decisions.

Sales Stability: Companies with Continuous Source Revenue may be better supported by higher debt because they can pay the debt.

Property Structure: When real estate is higher relative to existing assets, higher debt support can be backed up due to the security component. The lender is aware that if the interest can not be paid, real estate can be sold.

Operational risk: The relationship between fixed and variable costs indicates that high operating capital ratio will result in a high level of fixed costs. Therefore, companies that are highly motivated to operate should have low financial resources to prevent increased costs.

Governance: These attitudes change over current financial conditions and whether personal styles tend to be more conservative or aggressive.

Lender and credit rating agency Attitude: The company's credit rating has consequences for all of the company's financing policies.

It is essential that managers are aware of the information Obtained from making decisions on budget budgeting and it is not only limited to the financial management department. Often in companies, the capping capital budget is made by managers who can turn off any investment project no matter how profitable they could be. Therefore, there must be a good two-way communication process between senior management and financial management to prevent conflict.

One way to accomplish this is by SWOT analysis. Before developing strategies for achieving business goals, the administrator needs to gain access to the company's internal strengths and weaknesses. This assessment should include the company's financial health, physical capital, human capital, productivity efficiency and product demand. External threats and opportunities that affect the company's ability to achieve its goals must also be kept in mind. An external threat and opportunity analysis could include assessing behavior by competitors or assessing the impact of the business cycle on customer income and product demand demand. The SWOT analysis helps the company understand existing constraints aimed at both internal and external forces, enabling the company to take remedial actions, wherever possible, to better locate themselves to achieve their goals.

By Implementing SWOT Analysis Properly More information is available to make informed decisions about capital costs. The device can then be implemented using standard investment decision-making methods like NPV, discounted repayment time and IRR. By providing SWOT analysis to assist decisions budget budget the threat of failure deceases. However, review or final review is reviewed to review the performance of investment projects after they have been implemented. Although the estimated cash flow is uncertain and no actual values ​​should be expected to approve the estimated value, the analysis should attempt to detect systematic bias or errors in individuals, departments or departments, and try to identify the reasons for these errors. Another reason for reviewing the project is to decide whether to stop or continue projects that have done bad. In order to avoid bad performance, various risk factors in decision making on capital decisions need to be applied as strictly in the review process to assist in decision-making processes for future decisions on capital expenditures.

Source by Tom Feinberg

Leave a Reply

Your email address will not be published. Required fields are marked *