The proper use of the capital budget is necessary to decide which profitable investment projects help us achieve our objectives, representing greater income in the future, with the aim of identifying how much would be spent on the entire project, determining the recovery time, number of profits to be generated and the method to be used.
1.- Conceptual Framework
The capital budget is seen as synonymous with long-term investment; Investments that are studied in the capital budget may include fixed assets, intangible assets, permanent investments in working capital, and opportunity costs; in other words, the benefits that are sacrificed as a result of accepting a project or expenses that are avoided as a result of making an investment.
The capital budget must be related to the general strategic planning of the company since excessive or inappropriate investments will have serious consequences on the future of the company. Following are some definitions of the capital budget -Table 1-.
Table 1 Definition of Capital Budget
| Author | Definition / Contribution |
|
Sangacha; 2012 p.1 |
Capital budgeting refers to investments in fixed assets or in the design of methods and procedures necessary to produce and sell goods. Its planning and control horizon is long-term, since the concepts it deals with are maintained for several years. Also, your operating and financial results may not be immediate. |
|
Chan 2011, p4 |
Capital budgeting is the process of evaluating, selecting long-term investments consistent with the business objective, and maximizing the owners' investment. |
| Johnson and Gentry, cited in Vásquez 2011 | It refers to the fact that the money to be invested is scarce and must be budgeted among competitive investment alternatives. |
|
Chambergo; 2009, p.1 |
It is the plan that contains the information to make decisions about long-term investments (Decisions related to the company's infrastructure). |
| The capital budget is part of the financial budget together with the cash budget | |
|
Garcia; 1998, p. one |
complementing the operating budget that includes the budget for sales, production, inventories of finished products and in process, consumption and purchase of materials, considering in turn the material inventory budgets, the direct labor budget, manufacturing expenses and operating expenses |
Source: self made; June 2018
The capital budget is then considered as an alternative used for the planning process of expenses corresponding to those assets of the company, answering three basic questions: How much to invest? What to invest in? and finally, where to obtain the resources to carry out the projects?
2.- Simplified approach to the Capital Budget
In order to have a simplified vision of the capital budget, a conceptual map was prepared -Figure 1- where it is reflected that the capital budget is made up of two budgets, 1) the investment budget and 2) the financing budget; On the other hand, figure 1 also defines the evaluation methods to be used as a central aspect of the capital budget, for a maximization of the value of the company.
Capital Budget
The conceptual map yields valuable information that allows the financial manager to make an adequate decision considering various factors that are combined, to make the capital budget decisions the most optimal, also, it is proposed that with the understanding of this map it can be evaluated the opportunity costs between one or the other alternative without losing sight of the respective limitations in each evaluation method.
3.- Capital Budget plus Strategic Planning
In a competitive environment, organizational and projection decisions in a company are determined mainly in the process called Strategic Planning, this is a tool that significantly helps in the systematic planning of initiatives, projects and actions that must be executed to achieve the objectives., take advantage of opportunities, mitigate threats, improve skills, market positioning and the quality of products and services. -Market analysis-.
Strategic planning is a systematic process where objectives are defined and the corresponding strategies are formulated to achieve them -What to do? -; Long-term action programs are specified with the corresponding allocation of resources -How to implement them? -. Strategic decisions at the time of being taken can be proactive and / or reactive. Proactive decisions tend to delineate the future or establish a desired situation, while reactive decisions are taken when unforeseen changes arise in the environment -Opportunistic Planning- (Amaya, 2010).
It is expected that by merging the preparation of an adequate capital budget and an adequate formulation and implementation of strategic planning, a company that has a strategic positioning can be established, contemplating a domain of the organization, a distinctive competence and a unique positioning.
References
Amaya Chapa Néstor Efraín. (2011). Capital budgeting and valuation of investment decisions. Retrieved from
Chambergo Guillermo Isidro; Importance of the capital budget in investment decisions; Actualidad Empresarial, Nº 181 - Second Fortnight of April 2009.
García Mendoza Alberto Evaluation of Investment Projects ”, Edit. Mc GrawHill, Mexico 1998, p. one.
Johnson, Gentry Finney & Miller's "Principles of accounting," Prentice Hall, 7th ed., P. 609.
Sangacha Andrea; 2012. Higher Technological Institute of Commercial Administrative Professional Training
Vásquez Salazar Álvaro, 2011. USB - Public accounting, capital budget
