...Introduction Capital Budgeting is a process that allows businesses to assess whether their investment decisions like purchasing a new plant, constructing a new building, or engaging in a new venture is profitable enough to pursue. (Investopedia. 2015) When making crucial investment decisions, capital budgeting gives businesses a more informed way of deciding. This is because investment decisions are weighed in terms of the cash flows over the duration of the new venture or investment. This way, a company can have more visibility in terms of monitoring its cash flows for every period. Consequently, businesses can make an initial evaluation of pushing through a certain project or not. This is what makes capital budgeting very useful since companies...
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...time period, which may incorporate arranged incomes, cash flow, costs, resources, and liabilities. Budgeting alludes to the procedure of outlining, actualizing, and working budgets. Budgeting, as a control device, gives an activity plan to guarantee that the association's real exercises are slightest digressed from the planned exercises. Budgets are utilized to give an outline of the organization and procedures performed in it. They are helpful in asset allocation where assets are distributed in such a route, to the point that the techniques, which are relied upon to give the most astounding returns, receive top priority (Libby and Murray, 2010). Budgets are additionally forecast instruments and bring about a significant improvement readied to adjust to changes in business atmosphere. They ought to be produced in such a route, to the point that they consider the key necessities of each of the functions. Budget detailing comprises of an arrangement of exercises: a budget department is created in which a budget controller is appointed, strategies are developed for budget readiness, budget recommendations are created at the department level, the budget is developed for the whole company, financial backing period and key budget elements are decided, the budget is evaluated and approved, growth is observed, and the budget is amended (Carlson and Palaveev, 2004). Traditional budgeting contains a few issues or shortcomings. As indicated by feedback, companies these days ought to have...
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...In this essay I will write about corporate budgeting system and why companies should make it carefully. To begin with I'd like to explain what does «budget» mean. A budget (from old French bougette, purse) is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.[1] A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: 1. 1. Provide a forecast of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast. Organizations develop specific plans for saving and spending income and these plans, or budgets, are essential for developing spending and saving priorities. Properly preparing a budget also serves as a reference to check how well money is being managed during a period by allowing managers to see actual revenues and expenses compared to budgeted revenues and expenses. Corrective action can be taken earlier in a period when revenue shortfalls or expense excesses are identified. The term "budget" can be dated back to medieval England, where it meant "leather purse" or "wallet." A budget allows businesses to meet specific goals by...
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...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 3. Estimate...
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...Proposal to Board of Directors A Little Cup of Joe Introduction to the Proposal’s Purpose and Content A Little Cup of Joe Corporation is a medium-sized manufacturing company with 250 employees. It directly markets one product: a unique coffee cup with a patented ball bearing sliding mechanism. Nathan Jr. and a group of 10 other executives run the company. A Little Cup of Joe Corporation has received a large sum of money from a venture capitalist. The venture capitalist and Nathan Jr. are predicting 100 percent growth in five years. To achieve that growth, productivity will need to increase at a similar rate. Therefore, this proposal provides a suggested business model update. Further, the functional areas updates are indicated to assist the business model to predict, plan, and implement future growth and profits. In this proposal, the problem of the outdated business model and functional areas is addressed with new ideas and new employees to implement them. The 100 percent growth projection in five years can become a reality with the managers’ ideas about these questions: Executive Summaries The Accounting and Finance Area is one of the main parts of A Little Cup of Joe. Having A Little Cup of Joe accounting in top shape all year round will help the business function smoothly and provide grounds for sound and promising business decisions. By accomplishing this A Little Cup of Joe will hiring experience and ethical accounting...
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...Introduction………………………………………………………………………………........ 3 1.1 How budgeting can assist BBC capacity building Institute in planning…………………..3 1.2 Describing BBC Master budget and its detailed content……………………………………..4 2.1 Tools used for making a sound and justified strategic investment decision…………….7 3.1Comparative balance sheet and income statement of BBC for 2012, 2011..………….9 3.2 Calculated Liquidity, Solvency and Profitability Ratios for both years…………..........……10 3.3 Conclusions and best recommendations……………………………………………………11 Sources……………………………………………………………………………………….13 Introduction Finance is considered one of the most important aspects (units) of any institution, as it pertains to the arts and science of managing money (Khan & Jain 2007). There are major areas of finance including; * Financial services; which deal with the delivery of advice and financial products to businesses, individuals etc within the areas of banking. * Financial management; which deals with the duties of financial managers, and the said managers are responsible for budgeting, financial forecasting, cash management etc (Khan &Jain 2007). Applicably therefore, without financial help, or without a budget, it will be impossible for BBC capacity building institute to implement any plans and strategies, no matter how good they are. This is so because budgeting entails planning and control, and without these BBC is bound to crash. 1.1 How budgeting can assist BBC training Institute...
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...Strategic Initiative Paper – Barnes & Noble In order to be successful corporations have to plan how their business will run financially every year. There are a few different plans that are put together, usually overseen by the Vice President of the organization. Two of these plans include strategic planning which is the capital-budgeting process. The other of the two plans is financial planning. Financial planning entitles collecting sales forecasts from marketing personnel and production plans from operations, and then combining them to make projections of the firm’s future financing requirements (Barnes & Noble, Inc, 2009). While reviewing the annual report for Barnes & Noble, Inc, Team A will discuss the relationship between strategic planning and financial planning for Barnes & Noble, Inc. A strategic initiative will be described and will show how it affects the financial planning for Barnes & Noble, Inc. While there are many factors that can affect the costs and sales of an organization, Team A will discuss how the strategic initiative can be one of these factors. The final piece that will be discussed is the risks associated with the initiative and the financial effects they may have on the organization. Barnes & Noble remain the largest bookseller offering a wide selection of online retailing and discounted, high quality books to enrich, enlighten, and educate its readers. In October 2009, Barnes & Noble launched the nook, the most full-featured eBook reader...
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...CHAPTER-1 INTRODUCTION FINANCE: Business concern needs finance to meet their requirements in the economic world. Any Kind of business activity depends on the finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they need finance to fulfil their business activities. In the modern world, all the activities are concerned with the economic activities and very particular to earning profit through any venture or activities. The entire business activities are directly related with making profit. (According to the economics concept of factors of production, rent given to landlord, wage given to labour, interest given to capital and profit given to shareholders or proprietors), a business concern needs finance to meet all the requirements. Hence finance may be called as capital, investment, fund etc., but each term is having different meanings and unique characters. Increasing the profit is the main aim of any kind of economic activity. MEANING OF FINANCE: Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns. DEFINITION OF FINANCE: According to Khan and Jain, “Finance is the art and science of managing money”. Webster’s...
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...Assignment 2: Capital Budgeting Craig Kung Strayer University February 5, 2011 Abstract Bauer Industries wants to investigate the decision to have an additional division added that constructs lightweight trucks. Bauer found that the project would take 10 years to complete. This paper analyzes several scenarios that affect the Net Present Value (NPV) of the Free Cash flow projections from Year 0 to Year 10. The comparison of the various options will aid Bauer Industries in formulating a wise decision. Keywords: investments, capital budget, earnings, forecast, NPV Introduction To invest or not to invest, that is the question. That is the main question that businesses ask when an opportunity to invest in a capital project presents itself. Capital projects are normally long term ventures that require substantial amounts of capital funding. With as much funding and planning necessitated for such extraordinary projects, a very meticulous assessment must be made. So how does a company choose whether or not to invest in a capital project? They use proven analytical methods to evaluate the profitability of the project. Ye Sudong and Robert Tiong (2000), authors of NPV-AT-RISK METHOD IN INFRASTRUCTURE PROJECT INVESTMENT EVALUATION (2000) explain that “the project evaluation methods may systematically be classified into three categories: methods based on return, methods based on risk, and methods based on return and risk” (p. 227). The methods that...
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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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...vice president of the Company, Emily Harris, is to forward her project proposal to the Budgeting Committee for evaluation. The Vice-president’s objective for proposing the project was based on potential to strengthen the Company’s division of production and drive future growth. Emily Harris has to produce a compelling project to avoid the committee from declining the proposal. Basis of Assessment There are two projects between which the company can choose from or drop the proposals in their entirety. The methods of project evaluation would be based on discounting cash flows analysis and thereafter determining the Net Present Value (NPV) of each of the proposed project with Internal Rate of Return (IRR), Profitability Index and Payback Period. If the project has a positive NPV, it would suggests the project is generating more cash than is required to service the debt and provide the appropriate returns; thus, the higher NPV, the better it is for the company. The project proposal with the positive and highest NPV, IRR and profitability index along with the shortest payback period would be acceptable for investment. New Heritage Doll Company managed to produce a capital budgeting structure in order to evaluate the revenue generated in the Doll industry. It is clearly evident that a segment of the Doll industry generates income progressively with an increasing rate of 4.6%. Cash flows forecast is used to capture the incremental effect of a proposed project in order to acknowledge...
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...projected plan and make corrections as needed. This type of planning involves broad strategic planning (generally over a five year period), short term operational planning (usually for a one year period), budgeting (quarterly), and forecasting (monthly, quarterly, or yearly). Depending on the size of the business and the requirements of the assignment, your Business Plan may only include some of these areas, such as strategic and operational planning. If your objective is to secure funding for a new business, your goal is to describe the company's mission and strategic methods for attaining that mission. This includes aspects of planning discussed above such as strategic and operational planning. However, it is important for you to identify what type of financial backing you are seeking and who your audience will be because this affects the plan's emphasis. If your audience is a venture capital firm or other equity investor, your Business Plan should emphasize their return on investment when the business performs well. On the other hand, if your audience is a bank lender or other debt investor, your Business Plan should emphasize how the loan is protected in the event the business performs only moderately or fails. Lenders often require collateral and want to see forecasts of stable cash flows needed...
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...income statements, balance sheets, and the statements of cash flow on a pro forma basis. * The statistics budget:- the statistics budget is used to project the volume for the coming year. These volume estimates are then used to help forecast revenues and expenses on an accrual basis (operating budget) and on cash basis (the cash budget).The capital budget is used to project the cost associated with the capital acquisitions. * The operating budget:- it is the second major type of budget. It comprises of two sub-budgets, the expenses and revenue budgets, both of which are prepared on the accrual basis of accounting. * Expense budget- the expense budget is a dollar estimate of the amount of resources needed to provide services during the coming year. In large organizations, expenses are usually developed on a department-by-department basis and then consolidated into a single document. Currently, though there is a trend to develop projections along product lines as well as by department. The expense budget comprises the bottom part of the operating budget. * Revenue budget-The amount of money allocated to the maintenance and growth of a business. A revenue budget is essential to management and is the result of a business's forecasts of sales revenue, expenses and capital expenditures. Revenue budgets help business save time and effort by the proper allocation of resources. * The cash budget :- An estimation of the cash inflows and outflows for a business or individual...
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...The main objective of the course as described above is to guide the MBA students in the formulation and implementation of financial strategies as part of corporate growth in a profit oriented venture. It specifically seeks to aim at the following learning process: 1. The analysis of past and formulation of future short-term financing needs of the firm. The students are expected to be able to analyze and read past performance, and the most important of all on the basis of the analysis come up with pointers on how to forecast cash position and finance them through short-term financing instruments. This of course includes the knowledge of how to hedge foreign exchange exposure in case of foreign currencies loans. 2. The advanced concept of capital budgeting. The students are expected to be able to identify risks and match them with the relevant return prospects of a number of capital investment projects, which include ranking projects, consideration of lease and buy alternative, project financing prospect (in case of loan financing), and other relevant matters. 3. The choice of a capital structure mix for growth strategies. The students are expected to comprehend the wisdom of choosing debt and equity financing, and able to put in to practice a convertible debt-related financing for growth. This includes the skill development of how they encounter a merger and acquisition (M & A) deal in practice. 4. The minimization of risk of assets and liabilities. The students...
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...intentional diagram that concentrates on his or her long-standing objectives and how to attain them. The layout of the graph on average takes in economic predictions and protects a five-year phase. Next productions arrange a once a year process set up that offers a comprehensive viewpoint for the upcoming year. Because things revolutionize after the year begins, companies change his or her tactics, companies sometimes give up his or her everyday ideas. The familiar charts get sudden and unforeseen modifications into deliberation. Businesses frequently build up calculations or unofficial predictions during the year. For instance, industries regularly forecast his or her once a year transactions in the middle of the year. Then, corporations manufacture a production strategy, which makes use of an order to submit an application for venture investment and extra savings. To connect in several money-making business projects, a business provides work for indicating or relating to income to take...
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