Capital Budgeting in small Firms

Essay by umairanwar71C, August 2006

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Benefits and costs of such a system to smaller businesses (SMEs)

The financial management of an organization has a very important characteristic that is capital budgeting of the firm. The capital budgeting of an organization is very important because capital assets are long term and the budgeting process should be very carefully handled as the company has to experience it for longer time. The capital budget has minimum of five years of duration. The basic reason of the long duration is the planning involved and the expectations with capital budgeting. The overall fraction of capital assets is smaller as compared to the current assets of the company. Capital expenditure benefits an organization for longer then a year and capital budgeting is used to generate and evaluate capital expenditure. (Dr. Sharron Garrison, 2005). Dr Sharron explains in his research that in capital budgeting cash flows are more important as they are called as net investment which in end of year named as net cash flows and in evaluating, discount cash flow to present value are identified and the techniques are basically used to analyze real assets not the financial assets.

The knowledge about capital budgeting is very important for company managers or even CEOs because it impacts the whole company's future prospects. There should be timed decisions on capital budgeting because there are very large investments so it can cause bad results with loss of quality assets and money. The capital budgeting is made for the needs of the company for future usage for example introduction of a new product in market that is required by customers and can benefit a lot better then other products are giving. The assets are generated in future and the capital budgeting for those assets that are measured in after tax cash flow. The calculation...