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Capital budgeting is the active application of identifying, continuously evaluating, selecting, and controlling an organization’s capital investments (Blocher, E., Stout, D., Juras, P., & Smith, S., 2019). One topic of key interest related to capital investments was financial decision making. Relevant information for decision making is the future costs of revenues that differ between decision making points. This applies to capital budgeting, accounting, and financial resources and can be vital to the success for a company (Bennoua, K., Meredith, G., & Marchant, T., 2010).
The steps of strategic decision making include determining the strategic issues around the problem, seeking alternative solutions, obtaining information and conducting proper analysis of the presented alternatives, choosing and implementing the alternative, and providing an ongoing evaluation of effectiveness of the decision made. (Blocher, E., Stout, D., Juras, P., & Smith, S., 2019). Regarding capital budgeting, there is a constant need for analysis and evaluation. Since there must be a constant analysis, there should also be an effective monitoring process implemented. These can include estimating required investments for future research and development for an organization, operating costs for the company, anticipated earnings, potential losses, and quantitative and qualitative effects on the organization. While there is simplicity in the model, it can be very beneficial for companies for strategic analysis (Yunker, 2003). By applying strategic analysis of the capital budget, it will allow the company to continually monitor and adjust the decision and/or potential investments with capital budgeting. This is an accounting heavy area and should also include a post-audit and assessment for the decisions made to ensure that the company is consistently improving. From this perspective, accounting would primarily play a facilitative role, providing information to the company about implementing decisions through various decision making models based on financial performance. Accounting can help specifically with four areas in capital budgeting, an organization’s master budget/planning, strategic planning, the organization’s balanced scorecard/control, and providing updated relevant data for investment analysis and post-audits and control for the company (Blocher, E., Stout, D., Juras, P., & Smith, S., 2019).
Another key concept is Cost-Volume-Profit Analysis (CVP). CVP is a short-term profit-planning method to prepare and analyze how operating costs, operating decisions, and marketing decisions will affect short-term financial performance. These variables include relationships between variable costs, fixed costs, unit selling price, and output levels for the organization (Blocher, E., Stout, D., Juras, P., & Smith, S., 2019). The operating model for CVP Analysis is Operating Profit = sales – total cost. This can also include the break-even analysis for companies so they can understand at exactly what point they have made back the money they have invested in a product or service (Gallo, 2014). By taking this approach, the company can include the five factors mentioned and determine their overall costs, determine a selling cost unit, total costs, sales volume, and selling prices (Blocher, E., Stout, D., Juris, P., & Smith, S., 2019). In terms of capital budgeting, CVP Analysis provides a framework in which a short-range plan can be developed and implemented to analyze and look at future success for the company even if in small increments. By doing this, it can allow specific, strategic goals to be attained in the short-term, which in turn, can allow for larger goals and benchmarks to be achieved by the company. The process is continuously evaluated, selected, and used in financial allocations and resources for the company. Additionally, it can help bring the company’s capabilities in line with the short term goals and implementation of new measures, financial goals, and financial investments (Blocher, E., Stout, D., Juras, P., & Smith, S., 2019). This can be very effective in looking to accomplish strategic goals.
References
Bennouna, K., Meredith, G. G., & Marchant, T. (2010). Improved capital budgeting decision making: Evidence from Canada. Management Decision, 48(2), 225-247. doi:http://dx.doi.org.ezproxy.
Blocher, E., Stout, D., Juras, P., & Smith, S. (2019). Cost management: A strategic emphasis (8th ed.). Boston, MA: McGraw-Hill. ISBN: 9781260165180
Gallo, A. (2014, November 02). A Quick Guide to Breakeven Analysis. Retrieved from https://hbr.org/2014/07/
Yunker, J. A., & Yunker, P. J. (2003). Stochastic CVP analysis as a gateway to decision-making under uncertainty. Journal of Accounting Education, 21(4), 339-365. doi:10.1016/j.jaccedu.2003.09.
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The post discusses capital budgeting and the role in plays in various organizations. According to the author, capital budgeting is the process in which capital investments are identified, evaluated, and controlled so as to ensure that they generate positive returns and profits in the future. During capital budgeting, the management must be shrewd to ensure that any financial decisions that are made are in line with increasing the profitability of the company both in the short-term and in the long-term (Blocher, Stout, Juras, & Smith, 2019).
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