Capital Budgeting

Silicon Arts is a young startup that manufactures digital imaging integrated circuits. These circuits can be used for digital cameras, DVD players, computers, medical equipment and scientific equipment. A 4 year old company has successfully raised its annual turnover to $ 180 million. The market is strong, and the company hopes to expand short-term success. Hal Eichner, Chairman of the Board, recently organized a special team and created two capital investment proposals. This will bring significant revenue growth to the company.

Corporate finance operations include capital investment and long-term capital placement. Capital investment decision-making process mainly includes capital budget. Through the capital budget, the company determines capital expenditure, estimates the future cash flow of the proposed capital project, compares the planned investment with the potential earnings and decides which projects to include in the capital budget . Capital expenditure is probably the most important mission of corporate finance and can have a serious impact on business. Insufficient capital budget (excessive investment or under investment, etc.) may possibly impair the company's financial situation, probably due to increased funding costs or insufficient investment capacity.

The financial management of the organization has a very important function, that is, the company's capital budget. The capital budget of the organization is very important. Because capital assets are long-term and the budget process should be handled carefully. The capital budget period is at least 5 years. The basic reason for long term is to involve the planned budget and capital budget. The overall share of capital assets is small compared to the company's current assets. Capital investment lengthens the organization's profit for over a year, and the equipment budget is used to generate and evaluate capital investment. (Dr. Sharron Garrison, 2005)

There are various variations in the budget. Cash budgets are particularly important for emerging companies and growth companies. Capital budget is widely used when capital investment is important and frequently used. Human resources or "number of people" budget (capital budget of service company) can be used as a management of labor-intensive enterprises. However, when you use the term budget, it refers to a business budget that includes detailed income and expenditure accounts for the organization. It is grouped by business unit (such as department or department) or product or product line. Such documents are the core part of many enterprise management management systems.