Question

How would a CEO of a company in charge of the master budget plan for a large scale growth that requires heavy capital investment?

Answer 1

Capital budgeting

The capital budgeting decisions affect the rate and direction of growth of a firm. Right decisions will facilitate the growth in the desired direction. On the other hand wrong decisions may affect the survival of the firm.

Capital budgeting is a complex process.it involves decision relating to the investment of current funds for the benifit to be achieved in future which is always uncertain. Capital budgeting is a six step process. The following steps are involved in capital budgeting:

1. Project generation: -

The capital budgeting process begins with generation or identification of investment proposals. This involves a continuous search for investment opportunities which are compatible with the firm's objectives. A firm must analyse the environmental forces and recognise the opportunities available to it and the threats to which it is exposed.

2. Project screening.

Each proposal is then subject to a preliminary screening process in orderto assets whether it is technically feasible, resources require are available, and the expected return are adequate to compensate for the risk involved.

3. Project evaluation.

After screening of project ideas or investment proposals the next step is to evaluate the profitability of each proposal.This involves two steps a ) estimation of cost and benefits in terms of cash flows,and b) selecting an appropriate criterion to judge the desirability of the projects.

4. Project selection.

After evaluation the next step is the selection and approval of the best proposals in actual practice all capital budgeting decisions are made at multiple levels and finally approved by top mana6.

5. Project execution and implementation.

After the selection of projects funds are allocated for them and a capital budget is prepared. It is the duty of the top management or capital budgeting committee to ensure that funds are spending in accordance with the allocation made in the capital budget. After the preparation of capital budget and allocation of necessary funds,It is required to execute the projects in Time. Certain network techniques such as CPM,PERTetc can be used for the timely completion of the projects and ensure cost effectiveness.

6.performance review.

After the start of implementation of a project it's progress must be reviewed at periodical intervals. The follow up or review is made by comparingactual performance with the budget estimates. This helps to take corrective action.