...Capital Budget Policy and Process Vernita Davis-Knight Susan Friguglietti Edna Primas Ronald Rehn University of Phoenix-Online February 27, 2008 Capital Budget Policy and Process Capital budgeting is the process by which capital investment decisions are made. Capital can be described as an organization’s operating assets (Diamond, Hanson &, Murphy, 1994). The capital budgeting process includes "planning, setting goals and priorities, arranging financing, and identifying criteria for making long-term investments" (Diamond et al., 1994, p. 463). Previously, capital budgets were known as plant and equipment budgets (Berman, Kukla &, Weeks, 1994). As the previous term implies, most capital expenditures are long-term investments for plant or equipment investments. Most, if not all, organizations have limited financial resources and must decide how to invest the financial resources for the best advantage of the organization. Capital investment decisions have a significant impact on the organization since large amounts of the organization’s resources are at risk for extended periods of time. This makes capital budgeting one of the most important decision making opportunities an organization can undertake (Diamond et al., 1994). There are two basic types of capital budgeting projects, independent projects and mutually exclusive projects. The independent project does not affect the cash flow of other projects. That is, regardless of whether the project is accepted...
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...Capital budgeting Making decisions having significant future benefits or costs for various entities and their stakeholders. Capital budgeting is the backbone of financial economics. Related topics in financial economics include: the time value of money, the meaning of net-present value, accounting concepts consistent with present-value calculations, discount rates, and option valuation techniques. In the public sector, the term is often exclusively associated with infrastructure investments -- plant and equipment. It is more properly associated with all policy choices that have significant, long-term consequences: especially decisions about missions, programs, products, processes, or procedures. There are standard solutions to several kinds of capital-budgeting problems: make or buy decisions, investment in working capital (especially inventories) decisions, maintenance-level decisions, project selection, the choice of mutually exclusive investments, and investments in plant with fluctuating rates of production. However, the same basic calculus of benefits and costs is supposed to guide all classes policy choices with long-term consequences. Financial Theory Financial theory teaches that, in the presence of a capital market where funds can be obtained at a price, welfare will be maximized by the implementation of all policy choices that generate positive net-present values. This means, in part, that the timing of benefits and costs is generally of no...
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...Health Care Budget Effective financial management is the basis of thriving health care organizations. Organizations must make good investment decisions based on objective analysis (Healthcare Financial Management Association [HFMA], 2005). Integration of financial management principles provides decision makers with guidance to make capital decisions maximize mission-based benefits at effective costs (HFMA, 2005). An operating budget is the statement of profit and loss for the entire organization. Various health care entities prepare operating budget for the following year for discussion and approval by top management (Academic Writing Tips, 2011). At the end of the year, departmental managers provide an account for the previous year’s financial performance (Academic Writing Tips, 2011). Effective Financial Management Practices in Creating and Monitoring a Budget Effective financial management is useful when creating and monitoring a budget. The budget must include data relevant to the organization. An operating budget is a profit and loss statement of projection. The budget must include estimates of revenues and future expenses. Financial managers should present the operating budget with the correct schedule. Leaders must present financial statements such as the Statement of Cash Flow, Statement of Revenue and Expense, and Balance Sheet with the operating budget as supporting documentation explaining the financial practices of a company (Academic Writing Tips, 2011)...
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...Chapter 4 – Operating Budgets: A budget can be a process, a document, an accounting ledger, a plan, or a system. Local gov’t budgeting process unique – product of geographical, historical, economic, political and social factors peculiar to that jurisdiction. Budgeting is a unified series of steps to line and implement four functions: ❑ policy development – as policy instrument, CEO and legislative body need to articulate the goals, objectives and strategies that underline the budget – the flip side of proposing policy changes is accountability ❑ financial planning – includes gov’t financial condition; current/past-year trend financial act. by dept or prog; formal revenue est; look to the future to anticipate events/conditions; ensure debt service remains under control (while debt service receives first draw on municipal exp, financial plan set a rational debt service level for multi-year period ❑ service/operations planning – blueprint that governs the amount of service provided ❑ communications – way for decision makers to communicate changes in priorities, rationale for decisions and changes to vision in the future The final step in securing a framework w/in w/c the needs of policy setting, financial planning, service planning and communications can work is the development of quantitative performance measures. Environment/actors dictate the extent to which the linkage occurs and the form of linkage. Four phases of local budget cycle: ❑ planning/preparation...
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... 1. Definition [1] * A budget is the financial blueprint or action plan for an organization. It translates strategic plans into measurable expenditures and anticipated returns over a certain period of time * Budgeting is the process of creating and preparing an organization for the future. 2. Objectives[2] * The budget provides a yardstick for future results can be compared; * It allows management to plan and forecast in the areas of capital adequacy in work and or other types of scarce resources available; * Budget may direct cost of capital towards the most beneficial; * Budget support planning and control income and expenditure for maximum profit can be achieved; * It acts as a guide for management decisions when unforeseen conditions affect the budget; * It support for decentralization of responsibilities for each of the managers involved. With the establishment of the budget, the relevant managers will better understand what the company expected from them. So there is a congruence of objectives between the company and employees. 3. Classification of budgets [3] A series of budgets are linked together in a Master Budget. The major parts of Master Budget are Income Statement budgets and Balance Sheets budgets as follow: 4.1 Income statement budgets: * Sales budget: indicates for each product the quantity of estimated sales and (2) the expected unit selling price * Production budget: set up the number of units...
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...accounting as a process of providing both financial and non-financial to decision makers. The varying nature of business characteristics implies that also techniques used in managerial accounting for each business differ as the business grows. During start up the business rely on capital investment and budgeting techniques. A mature business relies upon quality control and cost management. Techniques used ultimately assist the business to achieve its long-term and short-term aims via efficient decision-making. The objective of this paper is to study each concept available in the accounting definition and provide a framework needed for deep understanding of aspects and issues involved in the process of accounting. The paper will have two part. The first part will look at the first aspect that is to define managerial accounting and look at its role, techniques and ethical issues facing managerial accountant. We will also highlight the role of a managerial accountant. In the second part, three topics will be covered. The three topics are; cost investment techniques, budgeting, and quality control. In the selected topics, real-world cases will be presented in relation to how they relate to managerial accounting techniques. Managerial accounting is defined as process involving preparation of management accounts and reports so as to provide timely and accurate statistical data needed by managers in their routine decisions. It might also involve identification of information, analyzing, measuring...
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...faster and at lower costs. With the emergence of this sophisticated technology, the company requires change to cease the decease of revenue and sales (University of Phoenix, 2012). Guillermo hires Jevaloch Consulting Firm, Incorporated to examine his current business forecast and choose strategies in optimal working capital. Additionally, Jevaloch will also provide an efficient pro forma budget and recommend an implementation plan. Guillermo Furniture Forecast Forecasting is an important tool for estimating the future market value for the business. Jevaloch consultants began the examination of Guillermo Furniture by reviewing a six month Figure 1.1 Budget Sales Forecasts. Figure 1.2 Actual Sales Forecasts. projection of sales forecast for units of chairs, the top sales item for the store, sold from January to June 2010. Figures 1.1 and 1.2 are representative of the budget unit sales and actual unit sales for Guillermo Furniture. The average monthly demands for the budget sales is 18,014/6 = 3002.3 and 17,997/6 = 2999.5 for actual sales. Although the monthly averages differ slightly, the actual sales are higher per month than the budget sales. Budget sales show a steady increase with a dip in the month of June and actual sales remain steady at about 3,000 units with a slight dip in March. Jevaloch concludes Guillermo possesses excellent managing skills for the company and proceeds forward with the optimal...
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...Capital Budgeting Introduction Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. A firm using capital budgeting, their goal is to see if there fixed income will cover itself for profit. Fixed incomes are things such as land, plant and equipment. When a firm using a machine to produce its good or service. They most of the time what the machine to produce the amount that they paid for the machine and more. The capital expenditure is the outlay of fund that a firm expects to produce and benefit with in a one year. The Capital Budgeting Process When approaching the problem of trying to the measure capital budgeting. The first step in capital budgeting is the Proposal generation. The proposals are made at all levels within a business organization and are reviewed by finance personal. The Second step in the process in the review and analysis. The formal review and analysis is performed to assess the appropriateness of proposals and evaluate their economic viability. Once the analysis is complete, a summary report is summated to decision makers. The third step in the process will be the Decision making. Firms typically delegate capital expenditure decision making on the basis of dollar limits. The board of directors must authorize expenditures beyond a certain amount. Often plant manager are given authority to make decisions necessary to keep the production line is moving....
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...Chapter 3. The Optimal Capital Budget Up this point, we have discussed some of the issues regarding a firm’s cost of capital and capital budgeting decisions. In the process, we have looked at some of the techniques a financial manager can use in identifying the cost of various forms of capital and choosing projects that are “profitable” to the firm. Based on our earlier discussions, we know there is a significant relationship between a firm’s cost of capital and capital budgeting decisions. In order to decide whether a project is desirable, a financial manager uses the cost of capital the firm faces to determine the project’s net present value; or compare the project’s IRR with the cost of capital. In addition, we also know that the cost of capital a firm faces might not be constant (i.e. the firm’s MCC schedule might experience several break points). In that case, how does a firm decide what is the appropriate cost of capital? And how does it decide the optimal budget it needs for project investments? In order to answer those questions, we need to first look at a firm’s investment opportunity schedule (IOS). The Investment Opportunity Schedule (IOS) The concept behind the IOS is very similar to that of the MCC schedule. The MCC schedule represents the cost of capital faced by the firm (ranking from the cheapest to the most expensive) while the IOS represents the projects that are available to the firm (ranking from the most desirable to the least desirable). In order...
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...SUMMARY OF CHAPTER 9 BUDGET PREPARATION Nature of Budget Budgets are an important tool for effective short-term planning and control in organization. An Operating Budget usually covers one year and states the revenue and expenses planned for that year. It has certain characteristics like: * A budget estimates the profit potential of the business unit. * It is stated in monetary terms, although the monetary amounts may be backed by the non-monetary items like units produce and sold. * It generally covers a period of one year except the seasonal businesses. * It is a management commitment that managers agree to accept responsibility for attaining the budgeted objectives. * The budget proposal is reviewed and approved by an authority higher than the person preparing the budgets. * Once approved the budgets can be changed only under specified conditions. * Periodically, actual financial performance is compared to budget, and variances are analyzed and explained. * The budget is different from strategic planning and forecasting. Uses of Budget Preparation of an operating budget has four principal purposes. 1. Fine Tuning the Strategic Plan: * The strategic plan of the last year can help the managers in preparation of the budgets. * And budget preparation also provides an opportunity to make decisions that will improve performance before a commitment is made. 2. Coordination: * Every responsibility center manager participates...
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...decide which, if any, projects or investments opportunities the organization should undertake. The task of analyzing and comparing financials is a daunting task, but when utilizing the tools of capital budgeting, the process of this type of business decision making can be quite useful. This paper will define capital budgeting and discuss some of the components of this decision making tool. It will also discuss some of the concerns that go along with Capital Budgeting. The Basics of Capital Budgeting What is Capital Budgeting? Organizations looking to expand their business through asset acquisition create a capital budget (Paden, n.d.). Capital budgets exclusively are associated with real estate, equipment and other potential assets used to evaluate asset impact and the potential benefit to the organization. Capital Budgeting is the process in which a business determines whether a project or investment venture are worth pursuing. It is the process of analyzing investment opportunities and deciding which one to accept (Berk & DeMarzo, 2014). Potential ventures are evaluated and the potential expenditures or investments are ranked. Usually, these types of business decisions are for large purchases or investments. Steps of Capital Budgeting There are seven steps involved in capital budgeting (Hofstrand, 2013). They are: 1. Identify long-term goals of the organization 2. Identify potential investment prospects for meeting long-term goals identified in Step 1 ...
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...the assessment for JCT2. The course covers 10 competencies and represents 3 competency units. Introduction Overview In this course, you will be challenged with learning about the integration of activities that comprise a supply chain, from manufacturing goods through retailer sales. Understanding and proactive management of a supply chain is a key skill set for today's business executive. This course focuses on supply chain and distribution channel decisions within a global environment. The Marketplace Business Fundamentals simulation will provide you with the opportunity to apply, in a setting that simulates a real-world environment, a variety of business decisions that must be made when managing a business as a component of a supply chain. Watch the following video for an introduction to this course: Note: View the video in full screen at 720p for best results. Competencies This course provides guidance to help you demonstrate the following 10 competencies: * Competency 326.1.5: Budgets The graduate utilizes budgets and a variety of pro-forma statements for planning and control purposes including analyzing cash flows to assure adequacy of funds for capitalizing on business opportunities. * Competency 327.3.1: Continuous Improvement and Quality Management The graduate applies quality management methods for continuous improvement and proposes various quality improvements in an organization. * Competency 329.4.1: Operational Design The graduate designs capacity...
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...Making a Financial Case Understanding Financial Concepts Used To Inform Management Decisions 1: Understanding financial concepts used to inform management decisions 1.1: Explain the differences between capital and revenue expenditure, using examples Capital Revenue A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset. Within the Aneurin Bevan University Health Board we are governed by the ‘Financial Control Procedure – Capital Assets and Charges’ (Appendix 1). Section 4.2 of the procedure states: Capital expenditure is defined as expenditure which creates assets that are capable of being used for more than 1 year and: • Individually cost more than £5,000, or • Collectively cost more than £5,000, where the assets are functionally interdependent, have broadly simultaneous purchase dates and are under single management control, or • Form part of an IT network which collectively cost more than £5,000 and individually cost more than £250, or • Form part on the initial equipping and setting up cost of a new building, ward or unit irrespective of their individual or collective cost. Revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current...
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...UKCBC MANAGENING FINANCIAL RESOURCES & DECISIONS MARICICA FERARU PR6 STUDENT ID.-11315 2015 LEARNING OUTCOMES LO1 Understand the sources available to a business P1.1 Identify the sources of finance available to the new business you have chosen. P1.2 Asses the implications of the different sources of finance to your chosen business P1.3 Evaluate appropriate sources of finance for your chosen business project. LO2 Understand the implications of finance as a resource within a business P2.1 Analyse the costs of different sources of finance for your chosen business. P2.2 Explain the importance of financial planning to the business organisation you have chosen. P2.3 Asses the information needs of different decision makers in your chosen business P2.4 Explain the impact of finance on the financial statements of your chosen business LO3 Be able to make financial decisions based on financial information P3.1 Analyse budgets and make appropriate decisions from the case study P3.2 Explain the calculation of unit costs and make pricing decisions using relevant information P3.3 Asses the viability of a project using at least two investment appraisal techniques LO4 Be able to evaluate the financial performance of a business P4.1 Discuss...
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...CAPITAL BUDGETING DECISION 1. Meaning Capital budgeting denotes situation where funds are invested immediately and returns are expected after a year. In growing orgnisation capital budgeting is more or less continuous process and it is carried out by top management. The role of any Finance Manager is to critically evaluate proposal, evaluation of alternative proposal and select best one. The following are the some of the cases where heavy capital investment may be necessary. A) Replacement of fixed assets: - To replace old Assets. To buy Asset with latest technology. B) Expansion: - It means increase in production capacity to meet additional demand. C) Research and Development: - It is required for those industry where technology in changing rapidly. D) Diversification: - To set up factories, to fulfill need of various markets. To reduce dependency on one market E) Miscellaneous: - To meet legal norms, such as investment in pollution control equipment. 2. Features and significance of capital budgeting Capital budgeting includes investment for long firm funds for long term and their utilisation. Capital budgeting decision affects profitability of firm. Therefore these decisions are very important. A wrong decision taken by finance manager may affect firm’s profitability. The relevance and significance of capital budgeting may be stated as follows. A) Involvement of heavy funds: - Capital budgeting decision requires large amount of capital...
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