Benefits of Capital Budgeting
Investment appraisal (or capital budgeting) is the process used by organizations to access whether long-term-infrastructure or investments are necessary for the success of the company. It can either be capital budget, investment or expenditures. In other words, capital budgeting involve equitable distribution of funds/ resources in long-term schemes.
1. Consistency and flexibility
Anticipated business opportunities and possible constrains are easily developed based on the objectives of the company. Flexibility, on the other hand facilitates the strategic assessment of financing and capital budgeting, but consistency must be carefully deliberated before setting up any plan or objective. Given the relationship between tactics, strategy and goals in the ever changing environment, capital budgeting is certainly of utmost importance when it comes to equitable distribution of resources.
2. Better financial decisions
With capital budgeting, it becomes easy to analyze several investment options, for example calculating profitability index and payback period. Business executives can use different tools to come up with different recommendations. For this reason, make sure you use the most appropriate tool so that you can determine whether it makes financial sense to initiate long-term plans.
3. Access risk and uncertainty
Capital budgeting is the only sure way to access the risk involved when allocating more resources in long-term investments. We all know that any investment is clouded with risks and uncertainty therefore thorough assessment is necessary to make an informed decision whether or not to invest in long-term projects.
4. Analyze long-term repercussions
Capital budgeting has long-term effect on your business and unavoidably affects the organization’s future growth and cost structure. For this reason, the executive has to make a good financial decision since it affects the future of the company. In other words, capital budgeting will determine the success of the company.
Capital budgeting involves the use of several techniques that strive to estimate whether it is financially wise to initiate long-term projects. Most small businesses lack the know-how of implementing capital budgeting.