Capital Budgeting, Is Your Long Term Investment Worth It
Capital Budgeting is planning for major capital or investment expenditure.
Each individual company would have a different take on whether or not, particular means of outlay are necessary or risky.
In today's market, it really is not always easy to judge which move is best for your company, professionally.
Sometimes it may be necessary to take a route of long term payoff for example, you can not spend $500.000.00 cash at this point, but you are confident, according to your previous budgeting and work ethos, that you will able to make repayments of $5000.00 per month for a particular amount of time.
Yes, you may end up paying a staggering amount in interest, however, due to circumstance, this may be the most advisable committment for you to make.
It allows for a steadier and more balanced cash flow and a reliable cash flow is what you need to maintain the stability of your company.
Capital budgeting is a financial management requirement. The decision needs to be made based on whether or not the return will have a satisfactory cash flow and rate. It needs to be decided on real information, comparisons and markets. An intelligent and professional choice needs to be made with regards to the final requisition of this potentially large expenditure value.
You may buy machinery valued at two million. A large amount for many companies to spend. You might end up with repayments of one percent excluding interest per month. It is a lot of money, BUT it could be that within three years of your purchase, it has paid itself off. So although the machine itself may have depreciated in physical value, the value of the increase of your cash flow could be unquestionable, Provided you have done all the necessary research to account for the initial risk. Remember many capital investments are a risk.
On the other side of the scale, you may end up paying an incredible amount straight out for something, the markets could change, there could be great upheaval in your company and perhaps the capital budgeting process was not correctly completed or implemented. You have no money to maintain a cash flow because it was all spent on an idea that was not properly investigated and researched.
This is why capital budgeting, along with all budgeting is so incredibly important. Without it, your company is blind to which is the best direction to take, in any regard.
by: Andrew Junkuhn
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