Wednesday, January 18, 2017

Capital budgeting for financial management...

Capital budgeting for financial management and its process
Financial management is of prime importance in virtually all organizations that are performing any types of activities. It helps to set rational goal of the firm and guides how financial decisions should be made to achieve the organizational or business goal. Financial management is also important to an individual equally. For sound financial management good financial decision making is very essential and for good financial decision making the concepts, techniques and theories of finance should be known.

Every businessman should have proper knowledge of financial management for effective and efficient management of finance. Among the various techniques one of the most important techniques is capital budgeting technique. Budgets are of two types they are capital budget and operational budget. Operational budget is the budget that is planned and prepared for short period. It is prepared maximum for a year and is simply the estimation and planning for the business operation within a year. Capital budget in other hand is the long –term budgeting which may be five years, ten years and even more than twenty years. Capital budgeting depends on the size and nature of assets and properties a company or business acquires in near future. Capital budgeting is necessary for a business entity to get or step forward in the business and make important and risky decisions like new projects, business extensions, new plant and machinery, research and development. In the context of capital budget is provision of resources for acquiring fixed assets. Capital budgeting is the way of acquiring the fixed assets or process of investment in capital projects. Capital budgeting is the step-by-step process which includes identification of investment opportunities, prediction of relevant cost and benefits of identified projects, confirmation and monitoring & controlling the projects. Capital budgeting if done properly than there is sure the project runs towards success.

Following process should be adopted for successful capital budgeting:

1.     *  Find out why to invest: There can be many and different reasons why to invest. Reason may be form any sources it can be from, operation department to replace a plant, research and development department for development of new  products any board members may have reason to make investment in some profitable sector or may decide to expand the business. Proposals of investment are generated in this step of capital budgeting process. Reasons may be either not deniable or may be progressive for organization.

2.     * Estimation of cash flow of proposal: Cost and benefit of investment proposal with the time and effort required are measured in terms of cash flow. Expected cash flows of the proposed projects over the project period are estimated in this step. Firstly, Net cash outlay (initial investment) is estimated and annual cash flow which is the difference of incoming and outgoing cash from the investment on the proposal is predicted. Lastly, terminal cash flow which is the net cash flow at the end of the project is calculated.

3.     * Evaluation of the proposal: After the estimation of the cash flows of the proposals or projects the next step is the evaluation of the proposal. There are some methods to evaluate the proposal it can be done both by discounted cash flow method, non-discounted cash flow method or combination of both. Discounted cash flow method includes net present value method, internal rate of return method, modified internal rate of return method, and profitability index. Payback period calculation is commonly used non-discounted cash flow.

4.  * Post completion audits of proposal: The proposal is not passed or approved without full understanding and passing through different level of authority. The level of authority depends upon the organizational hierarchy, organizational size and number of authority holders. Usually, the entire capital budgeting proposal reaches to the president of the organization. Proposed projects are launched after getting due approval and acceptance from the authority. Finally, capital budgeting is done after.

These are the fundamental steps for capital budgeting that you can go through. Now, let us know about the projects and its classifications. As above I have already stated proposal may come from any sources. Those proposals after passing the steps or process of capital budgeting becomes a project. The projects are classified as independent projects, dependent projects, mutually exclusive projects, replacement projects, expansion projects and diversification projects. They are further described below:-

a.    # Independent projects: Independent projects are those type of projects in which, selection of one project does not prevent the selection of next or other projects. Approval of one project does not hamper the other project. For example installation of petrol pump and construction of mall are independent projects.

b.     # Dependent projects: dependent projects are those projects whose cash flows affect each other. The selection of one project directly affects the other or cannot neglect other project. For example construction of housing colony and land plotting are dependent projects.

c.     # Mutually exclusive projects: A project is said to be mutually exclusive projects if selection of one project neglects or rejects the other projects. For example construction of hotel or hospital in a land.

d.     # Replacement projects: Replacement project replaces the old project with the new one. Because of many reasons a project may not function well here replacement projects are necessary. For example replacement of old machines with new one due to wear and tear.

e.     # Expansion projects: expansions projects are those projects that are approved to expand the business. Expansion of business to new geographical area, opening new retail outlet are some examples of expansion projects.

f.   # Diversification projects: The projects that diversify the business are diversification projects. For example new product development or getting into new markets.

Capital budgeting should be done appropriately to gain profit from the business and have successful business. If you have any question relating capital please comment.
Organizing and Its importance in business...
(pic credit:pixabay)
Organizing and Its importance in business…

A business cannot be successful without proper management. Proper management means sound planning, organizing, directing and controlling of each and every activity that a business performs. Among the four pillars of management organizing is one that cannot be denied for better performance and results. Organizing is an important function of management. Organizing is process of identifying and combining of various activities, establishing authority and responsibility, relationship among job positions and maintaining good coordination and communication within the enterprise. Organizing function includes bringing together physical, financial, human and other resources and ensures optimum utilization of the resources available to achieve the desired performance or desired goals. Organizing activities in management is basically concerned with the creation of organizational structure which serves as the framework within which the enterprise performs. It links the activities or actions with the authority and responsibility in an enterprise. Organizing overall goal is to enable people to work together for common goal.

Organizing not only refers to the number of groups or department of people, but also the way they are interconnected and are related to each other. Organizing makes the activities best connected with the authority and responsibilities given. Organizing leads to proper arrangement of man, material and resources at right place and time. Organizing involves in dividing the work activities, linking the functions or activities and making organizational hierarchy with proper authority and reporting structure.

Organizing has high importance and need in a business or an organization for management, and a sound organization or business is a tool of effective management. With better organizing better management direction, coordination and control is possible.

Importance of organizing

Clear authority and responsibility: Organizing assigns each person to perform a respective task to perform; he/she is given necessary authority to perform the task. This helps to avoid confusions and conflicts in the organization.

facilitates coordination: Organizing aims at establishing relationship among various sections, departments, activities and functions so that each people perform different tasks in a coordinated manner.

* develops morale: By having appropriate authority and responsibility employees are allowed to make decisions for the task which accelerates to develop morale and build confidence.
* Optimum utilization of organizational resources: Organizational resources like, man, material and money are utilized at optimum level because of clearly defined jobs and defined resources for each activity.

* Specialization of the work: As organizing ensures right person at right place and time as per his/her skill, ability and knowledge which leads to improvement or specialization in the quality of work and also saving the time and expenses.

* Eliminates duplication of work: With proper organizing everyone is clear about their work and responsibilities as per their ability by which it eliminates duplication and re-works.

* Growth and Diversification: Organizing makes the organizational structure by which it facilitates the growth, diversification and expansion of business.

Adaptation of change: Change in environment can bring both positive and negative result for an organization. Organizing makes the structure of organization flexible enough to adapt the changes like product/service market change, technological change, political change and other different internal and external environmental change.

These are some of the importance of organizing. Good organizing never brings negative results; make sure you and your business is well organized. Have you ever felt that organizing has brought good outcome in your business please share to us.