Capital Budget

capital budget

The capital budget is critical; a company's capital budgeting decisions define its strategic direction and the results of capital budgeting decisions continue for many years, reducing flexibility. Carefully developed capital projects can save operating expenses by creating more efficient ways to provide services or by introducing energy-saving measures. The impact of capital expenditures on the operating budget should be carefully considered before capital budgets are made. For certain types of projects, a relatively detailed analysis may be warranted. For others, simpler procedures should be used. The cost of capital is affected by a number of factors. Those beyond a company's direct control are the level of interest rates, the market risk premium, and tax rates. But a company can control its cost of capital through its capital structure policy, its dividend policy, and its investment (capital budgeting) policy.

Read more: Capital budgeting insights - FierceCIO http://www.fiercecio.com/story/capital-budgeting-insights/2007-05-14#ixzz1eVY1nH3u

Capital budgeting is one of the most important tasks faced by CIOs, financial managers, and their staffs. Determining the correct level of IT capital spending requires insights that only a CIO can provide together with other insights that only a financial officer can provide.

First, a firm’s capital budgeting decisions define its strategic direction, because moves into new products, services, or markets must be preceded by capital expenditures.

Second, the results of capital budgeting decisions continue for many years, reducing flexibility.

And, third, poor capital budgeting can have serious financial consequences. If the firm invests too much, it will incur unnecessarily high depreciation and other expenses.

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On the other hand, if it does not invest enough, its equipment and/or software may not be...