Question

What are successful approaches to forecasting the needs for capital budgets? How much should we seek expertise in obtaining capital funding and creation?

Answer 1

The following are the popular approaches help you to forecaste the needs for capital budgets:-

1) Payback period method

2) Net present value method

Now let us discuss about the above said methods

1) Payback period method:-

a) Payback Period Method works on the length of time it will take to recover the cost of the purchase from earned net income (after taxes). For example, replacing old equipment with a newer model-total cost will amount $28,000, you’re convinced that it should help you turn out about 30% more units per week than the old equipment.

b) When net annual cash inflow is even (i.e., same cash flow every period), the payback period of the project can be computed by applying the simple formula given below:

PAYBACK PERIOD = INVESTMENT REQUIRED / NET ANNUAL CASH FLOW

c ) Vacationing to a particular place is usually a question of what/afford versus personal enjoyment, and it is a personal goal. To reach that personal vacation goal, small business owner must often count on the profits from the business. Profits hinge on asset investment rates of return. Equipment or facility purchase decisions require the balancing of a need for profit against cost to attain. There are a number of sophisticated record- keeping schemes and formulas to predict equipment replacement. However, many small business owners require nothing more than a simple approach.

2) Net present value method:-

a) Net present value method is preferable to the payback period method because it recognizes that, over time, the value of money depreciates (in the face of inflation). It calls for adjusting the expected inflow of income according to value tables that show the discounting of one dollar at different specified rates over the expected number of “payback years”. For instance, NPV consistently maximizes shareholders’ wealth. NPV of a project represents the expected increase in the value of the firm as a result of adopting the project.

b) Net present value is the difference between the present value of cash inflows and the present value of cash outflows that occur as a result of undertaking an investment project.

c) This method used in discounted cash flow analysis to find the sum of money representing the difference between the present value of all inflows and outflows of cash associated with the project by discounting each at a target yield.

The following points will help you to know the need of expertise in obtaining capital funding and creation:-

1) Before seeking long-term financing for capital projects, nonprofits should prepare for lenders to do due diligence in advance, looking at their organization holistically – from history and reputation to financial expertise and market position as these aspects tell much about a nonprofit’s ability to raise capital and how successful it will be.

2) The stronger these metrics are the greater chances that the nonprofit will be successful in its capital campaign and project completion.

3) Before seeking funding for any major project, take a holistic look at your organization, from your financial expertise to the competition in your field. Determine where your strengths are, and where your metrics could be improved.