Capital Budgeting - The Need and Importance of Capital Budgeting in Business

Need and importance of capital budgeting

Capital Budgeting - The Need and Importance of Capital Budgeting in Business
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Capital budgeting is an important step in every business organization. The below article speaks about the need and importance of capital budgeting in a business organization.

Capital budgeting has its own value and importance in a business entity. The concept of capital budgeting in a business entity is one of the most important ones, as it plays a significant role in maximizing the overall value of a business entity. Capital budgeting is about long term planning of a business entity.

Oftentimes, a business needs to make investments in various projects. As a normal practice, a business entity invests the money in the acquisition of fixed assets, such as, machinery, land or building. Since capital budgeting is a long term planning activity, the associated results are to be attained in the future. It is therefore important to carry out the process of capital budgeting effectively and efficiently, so that the accurate results may be determined in course of time.

Having been integral to budgetary control and policy making of a business organization, time and again, the need and importance of capital budgeting emerges.

Since the results are available only after a period of time, there is a constant need of careful assessment in relation to the capital expenditure to be incurred. In this way, both cash inflows and cash outflows are to be evaluated well.

Capital budgeting involves careful study in relation to capital outlays, as it’s a huge investment. It calls for the effective decision making process in terms of the acquisition of fixed assets, modification of fixed assets and replacement of fixed assets. Therefore, it is not only important to determine the capital expenditure of a business entity but also evaluate the results while considering various factors, such as, economic and social and technological etc.

It must be noted that the decisions relative to capital budgeting process are significant ones in determining an outcome and affecting the stability or profitability or growth of a business entity. It is thus very important to ensure well before any proposed capital outlays are made in a business.

 


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