Question

In: Finance

Address how a strong operating and capital budget process would assist achieving future financial goals (what...

Address how a strong operating and capital budget process would assist achieving future financial goals (what tools might you employ?). Explain why accurate cost allocation is important. What would be the priorities for capital budgets (in general, not specifically)?

Solutions

Expert Solution

Financial goals :

Financial goals are targets, usually driven by specific future financial needs of business plan and growth.

Setting short-term, mid-term, and long-term financial goals is an important step toward becoming financially secure to operate the business smoothly and expand to wards vision of organization.

Operational and Capital budget : The financial budget which have short term and relating business operation is operational budgeting. which give monitoring and controlling of regular cash flows. Where as Capital budgeting is part of planning on long term vision with low cost of capital and payback time lines.

Tools for achieving strong operational and capital budgeting :

Operational budgeting Tools:

  • Reporting/Analytics
  • Cash Position Management
  • Accelerate Receivables
  • Control Payables
  • Manage Expenses

Capital budgeting tools:

  • Pay Back period
  • Net present value
  • Internal rate of return

Importance of accurate cost allocation:

Investment decisions frequently require coordination across multiple divisions of a firm. To hold the divisions accountable for their scope, the central office ties the project acceptance decision to a system of cost allocations comprised of depreciation and capital charges. If the proposed project concerns a common asset that benefits multiple divisions, then our analysis derives a sharing rule for dividing the asset among the users. Capital charges are based on a hurdle rate determined by the divisional reports. We find that this hurdle rate deviates from the firm's cost of capital in a manner that depends crucially on whether the coordination problem is one of implementing a common asset or choosing among multiple competing projects. We also find that more severe divisional agency problems will increase the hurdle rate for common assets, yet this is generally not true for competing projects


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