Capital budget

At the beginning of a project, in addition to being committed to the idea, it is important to realistically identify the objectives and the actions necessary to achieve it. The budgets are quantitative expressions of these plans, ie a method to operationalize the goals and strategies of the project company.

Although, the realization of a capital budget should be a priority for all those who start a project, it rarely becomes a priority, which is usually a mistake since this is a financial plan that allows improving decision-making regarding the resources available, as well as being an indicator of what to do to achieve the desired objective. Likewise, they help to create engagement in each employee in relation to the organization since they are directly involved in the achievement of goals and even in the construction of new ones to improve.

As there are different objectives, there are also different types of budget, each one aimed at a specific function. For example: the master budget is a comprehensive financial plan for a year (fiscal) based on several individual budgets, by department and activities, also divided into quarters. The continuous or rolling budget is one that always covers 12 months, when a month ends in the budget another is added, thus, it seeks to ensure that administrators plan regularly.

To be able to build a capital budget, it is necessary to have data and estimates that allow us to calculate profits and even be able to determine if a project or product is profitable, to what extent and in what time the return on investment will be seen. An individual sales forecast is made by the sales staff, to unite it and present a joint one, the general economic environment, competition, advertising, pricing policies, etc. can be considered. It is also important to consider costs and activities related to cash. In terms of costs, historical data and relevant inflation figures are of great help. The cash budgetit is important for accounts receivable payment planning. Below are the suggested steps to complete a full capital budget:

DATA

1. Consider the assets to be acquired and the total investment that you need to have in order to start. It is important to know unit cost, salvage value, depreciable value and useful life of each one in years. Sales budget. Realizar una estimación de ingresos, lo recomendado es en un margen de 5 años, considerando unidades a vender y el precio unitario.Estimar los costos variables, tomando en cuenta la inflación. En éste se integran costos de mano de obra, materia prima y costos indirectos, así como el costo total unitario y la cantidad de unidades a producir.Determinar costos y gastos de operación, englobaldo salarios anuales y gastos administrativos.En el caso de solicitar financianciamiento se necesita la inversión total requerida, el financiamiento a solicitar expresado en moneda nacional y en porcentaje, y en caso de ser préstamo con banco se hacen también los cálculos con la tasa fija del crédtio y la duración del mismo.Calcular la tasa de descuento, mediante el cálculo de la TREMA (Tasa de Rendimiento Mínima Aceptable) y la Tasa de descuento o TREMA ponderada para poder definir cuál es el porcentaje de ganancia mínima que se le va a pedir al proyecto.

FINANCIAL EVALUATION

Calculate earnings, nominal and discounted cash flows for the estimated 5 years.

1. Revenue + variable cost = marginal profit Marginal profit - depreciation (machinery and plant) - fixed expenses (salaries and adm. Expenses) = profit before interest and taxes Profit before interest and taxes - interest = profit before tax Profit before tax - tax 30 % = net profit Net profit + depreciation = operating cash flow. It shows all the expected sources and applications of cash in order to know if the flow is ideal to achieve the previously designated goals.
   1. Net cash flow * discount value = Discounted cash flow. Discounted cash flow allows us to compare cash as if that cash existed in a current period.

Determine the equilibrium point. It is one of the strategic data for any project because we rely on the costs and fixed expenses previously considered.

1. Fixed Costs / percentage of marginal utility (to pay the fixed) = equilibrium point in sales expressed in national currency.

Financial evaluation of the project. 4 rules: VPN, IRR, IR and PDR

1. Determine the net present value by adding the previously calculated discounted flows Accept the project if the net present value of the $ flows is greater than 0 Add the nominal cash flow and the discounted flow per year to find out if the return on investment Calculate the IRR (Internal Rate of Return) with nominal flows Specify if the IRR is greater than the Discount Rate, or the minimum return required for the project Accept the project if the IRR is greater than the cost of Opportunity Obtain the IR (Profitability Index) by dividing the sum of discounted cash flow (year 1 to 5) between the initial investment and if it is greater than 1, the project is accepted.

PROFORM BALANCE

Check that there is a balance between assets and liabilities in each estimated year.

It is important to bear in mind that budgets are a very powerful tool for controlling and achieving objectives within the company, as well as for investors, if they exist, which also allows us to know where the company is going even before When starting operations, however, it should be considered that these can be compared with real results, that is, that it becomes flexible since sometimes the anticipated level of activity is not equal to the actual level of activity.

Flexible budgeting provides the expected costs for a range of activity or the budgeted costs for the actual activity level to prepare a performance report that compares the expected costs with the actual ones.

Budgets can be used to examine the efficiency and effectiveness of a business. The efficiency is achieved when a business process is executed in the best way possible, using the available resources, the effectiveness means that an administrator reaches or exceeds the goals described by the static budget.

However, it should be considered that changes are always needed in budgets, adjustments to obtain an activity and operation approach close to reality, for example, in a commercial company, the production budget is replaced with one of merchandise purchases, this identifies the quantity of each item for resale, unit cost and total cost, also the budget for direct materials and direct labor disappears. In a for-profit service company, the sales budget is also the production budget, the inventory budget disappears because the services produced will be those sold.

An ideal budgeting system is one that achieves total congruence with goals and simultaneously creates momentum for managers to achieve organizational goals in an ethical manner.

• Monetary and non-monetary incentives - means used to motivate managers to work toward organizational goals Participatory budgeting - emphasis on broad objectives and not individual budget items.

There is budget slack when you deliberately underestimate revenue and overestimate costs.

• Realistic standards - emphasis on broad objectives and not individual budget items Cost controllability - cost accountability Multiple performance measures avoiding myopic (narrow- minded) behavior, that is, taking actions that improve budget performance in the short term but cause long-term damage to the company.

That is to say, being able to define the objectives in advance allows to have a synchrony even with the employees, make them part of the common goal, work in the same line and achieve a win-win that benefits all the parties involved.

Gitman, L. & Zutter, C. (2012). Principles of Financial Management (12th Ed.). Mexico: PEARSON EDUCATION.