Capital budgeting process; meaning and process

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1. 5/18/2014 CAPITAL BUDGETING PROCESS; MEANING AND PROCESS
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CAPITAL BUDGETING PROCESS; MEANING AND PROCESS
July 3, 2010 by chinweike 11 Comments
Capital budgeting is a scientific process of identifying,
analyzing, selecting and implementing investment
projects with returns that are expected to span over
more than one year. Capital budgeting is also referred
to as investment appraisal. The importance of capital
budgeting in the process of investing cannot be over
emphasized as capital budgeting gives a calculated
insight into what is going to happen if investments are
made.
THE CAPITAL BUDGETING PROCESS
One thing I would like to point out here is that capital
budgeting is a process and not a destination. This is so
because of the loopy process of investment appraisal.
CREATION OF CAPITAL BUDGET: a capital budget is a long term document that contains a company’s
overall strategic plan. Capital budget normally prepared to cover longer periods than sales, production and
resource budgets as it usually ranges from three to five years. A good practice is to break this down into shorter
periods to match other budgets. Capital budget must be a three dimensional document as it has to take into
account the current production budget, future expected production level and the overall long-term development
of the organization, and industry as a whole. Capital budget should be made to be flexible enough to allow for
ongoing change.
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2. 5/18/2014 CAPITAL BUDGETING PROCESS; MEANING AND PROCESS
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INVESTMENT DECISION MAKING PROCESS: because of the fact that capital investment involves the
outlay of large sum of fund, care is taken to make sure that the best mix of projects are selected. Investment
decision making process has four steps that needs to be taken to fully get the best
Origination of proposals: you don’t just wake up one morning and find investment opportunities knocking
at your door. Investment opportunities have to be actively sought. When found, proposals should be
prepared to this effect.
Screening of projects: there is no way all identified projects can be profitably executed. A sort of selection
and screening has to be done to invest in the best possible project.
Analyzing and accepting projects: analytical tools like the ones you are probably seeing on this site are
used to analyse investment opportunities and certain acceptance or rejection rules followed.
Monitoring and reviewing of projects: you will quickly lose motivation and the zeal to succeed immediately
you stop monitoring your progress. You will get vital information from this process. This is applicable also
to investments.
An important concept that is very important to mention here. For a capital budget to be complete, care should be
taken to ensure that only relevant cash flows are imputed into the process. I will make a detailed post on this
next, so keep a date. Financial analysis is also a vital aspect that must be seriously taken into consideration.
I hope you will now agree with my initial assertion that capital budgeting is a process and not a procedure, just
like the name implies.
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Filed Under: Accounting & Tax
Chinweike Okwuduche is a Certified Information Systems Auditor (CISA) and an Accountant with a difference.
He Holds Bachelors and Masters Degrees in Accounting from University of Glasgow, UK. He has worked in
many industries including Education, Financial, Food and Utilities. He is currently a compliance and Risk
Management Consultant. He spends his spare time sharing some of his experiences by way of blogging.
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Comments
1. swati says
September 1, 2011 at 9:03 am

4. 5/18/2014 CAPITAL BUDGETING PROCESS; MEANING AND PROCESS
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really good and very interesting notes
2. OLANIYI ISRAEL O. says
October 17, 2011 at 2:20 pm
A BIG THANK YOU! YOU ARE BRILLIANT!
3. chinweike says
October 18, 2011 at 2:49 am
You are welcome Ola. I am glad that you enjoyed this article on capital budgeting process.
4. Lekan Raji says
January 19, 2012 at 3:20 pm
An interesting and educative articles.
5. chinweike says
January 20, 2012 at 2:47 am
Thanks Lekan.
6. Judith Adong says
March 6, 2013 at 10:35 am
so good notes and understandable.
7. Ggalabuzi Joseph says
March 7, 2013 at 12:01 pm
Gud work
8. Joel Okumu says
April 7, 2013 at 3:07 pm
capital budgeting is the process of evaluating , selecting long term-investment what does this mean to short
term investment?
9. Nakalema Judith says
January 17, 2014 at 6:33 am
since am going to do my exams ,these notes are really good.THANKS ALOT

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