What is the process of capital budgeting?
Capital budgeting is a term used to describe the process of project analysis, for which the funds in society could be earmarked in order to assess the merit and shortcomings of the use of funds for such projects in both long and short -term horizons. This process is very important to businesses because effective application of funds is necessary due to the fact that if an enterprise uses its limited resources for projects that may not soon bring results or may not be profitable, it will suffer from the consequences of reduced capital. The parameters for determining the exact factors that will lead the process of capital budgeting depend on the type of business concerned, the total capital with which they have to work, and the expected benefits of the proposed project. In this sense, two businesses can apply the process of capital budgeting on a similar project and achieve various conclusions due to their individual circumstances.
Example of the process of capital budgetingIt can be seen in the case of a ceramic society that is considering whether to open a new plant in another state. During the analysis of the company's situation within the capital budget process, the company will consider its cash flow in and out, net assets, one -time liquid cash with which it has to work, and the profitability of the current plant in terms of production and production. All of these factors will help the company decide how much it can save to achieve the goal of investing in a new plant. If the numbers are unable to add up in a positive way, the company may decide to allocate capital resources to other projects that will bring more positive results.
As regards how the capital budgeting process may vary for two companies that may consider a similar enterprise, this can be seen in the case of a more ceramic company, which can also consider the benefits of opening a new plant in another state. The second company could have different circumstances that may invest in a newWater with a good strategic business step. For example, the demand for products created by this particular company could be so much that it would be beyond the capacity of the current race.