Capital Budget

Capital budgets set out the expenditure necessary for the acquisition of longer-term estate and other investments, the return of which is longer than one budgetary period.

And how to set such a budget, most companies will start exploring fairly soon after the start of their business. It will begin to discover that equipment, machines and other production technologies are no longer sufficient and need to be changed in the light of their future developments, or to modernize their business premises, etc. The company is beginning to consider investments.

The question, however, is where to start and how to prepare the invest. It is clear that the performance of new investment must be more powerful than the current be as cheap as possible and, of course  return capital employed in the shortest possible time. Each such decision entails two basic facts:

  1. Immediate financial expenditure or debt received on the acquisition of the investment loan
  2. Expected future "inflow" of cash, i.e. return on the investment

If we decided to make the investment, we expect more produced unit per time, product improvement, more efficiency of activity, etc. It is necessary to choose the investment with most possible earnings and benefits.

Are we able choose such defined investment from other possible? Under which criteria and indicators? Do we have any tools and procedures to make our decision be as the best ones as possible? These decisions are very important, and we are acquiring assets with a view of several years ahead. In addition, the value of the investment purchased immediately drops sharply. Therefore, its immediate resale might not be the right step. You probably realize these facts if you ever bought a new car by yourself.

And the answer to the question whether we have any tools and procedures „how to choose it properly"? Yes, I do. We will talk about them in next articles.