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Posts Tagged ‘Budgeting’

A firm may be interested to invest its current funds most efficiently in the long term assets in anticipation of an expected flow of benefits over a series of years. This decision by the management is called as “Capital Budgeting”

The long term assets are those which affect the firm’s operations beyond one year period. The firm’s investment decision would generally include expansion, acquisition, modernization and replacement of long term assets.

Capital budgeting also refers to investment or capital expenditure decisions.

Capital budgeting or capital expenditure includes all those expenditure which are expected to produce various benefits to the firm over one year period and it encompasses both tangible and intangible assets.

A large number of companies are covering only expenditure on tangible fixed assets

Most companies follow the accounting convention to prepare asset-wise classification of capital expenditure, which is hardly of much use in the decision making exercises.

Some companies classify capital expenditure in a manner, which could provide useful information for decision making. The usual classifications are as follows:
Replacement
Modernization
Expansion
New project
Research and development
Diversification
Cost reduction

Capital budgeting involves a current outlay of funds in the expectation of deriving a stream of benefits extending over a period of time. Capital budgeting or capital expenditure represents the growing edge of a business.

Capital budgeting is considered to be very important for the under mentioned reasons:
They have consequences extending to a longer period
Capital expenditure decisions have considerable impact on what the firm can do in future
Capital expenditure decisions often involve substantial outlays
It may be difficult to reverse capital expenditure decisions because the markets for used capital equipment is often imperfect

Capital budgeting is a complex process, which may be divided into the following phases:

Identification of potential investment opportunities
Assembling of proposed investments
Decision making
Preparation of capital budget and appropriations
Implementation
Performance review

Identification of potential investment opportunities:

Capital budgeting involves identification of investment ideas which help in:

Monitoring the external environment regularly to scout investment opportunities
Formulating a well defined corporate strategy based on a thorough analysis of strengths, weaknesses, opportunities and threats
Sharing corporate strategy and perspectives with the persons who are involved in the process of capital budgeting
Motivating the employees to come out with various suggestions

Assembling of investment proposals:

Prospective investment proposals identified by the unit are assembled and  routed through different departments in order to have a different perspective about the investment opportunities available, thus helping in creation of a climate for bringing about coordination of interrelated activities/departments.

Decision making:

The decision making authority ensures the genuineness of the investment proposals before taking any decisions and the capital budgeting exercise ensures that the investments are made judiciously over a period of time

The decision making process consists of three levels:

Operating capital budgeting
Strategic capital budgeting
Administrative capital budgeting

Implementation:

Implementation  of the capital budgeting or investment decisions are done as per the following:

Adequate formulation of projects
Use of the principle of responsibility accounting
Use of network techniques
Evaluation

Performance review:

The post completion audit called as “performance review” is a feedback device and  is useful as follows:

It throws light on how realistic are the assumptions underlying the project and capital budgeting
It provides a documented log of experience that is highly valuable for decision making
It helps in uncovering judgmental biases
It induces a desired caution among the project sponsors

Creating a budget is hard work, as I and others have discussed elsewhere. Yet having a strong, accurate budget is an essential step towards financial freedom. Once the budget is created, then you need the determination and commitment to keep that budget, which can be difficult given the temptations of the world we live in. One of the ways to keep you on track is to include rewards in your budget.

Types of Rewards

While there are almost an infinite number of things that can be rewards, depending on your personality, there are really two types of rewards when it comes to maintaining your budget.

The first type of reward is what I call a maintenance reward. This reward is what you give yourself periodically for simply holding to your budget. The military gives medals for duration of service as well as heroism; a maintenance reward is like that, something you give yourself simply because you have been doing a good job.

Maintenance awards should not be large, but (of course) enjoyable. Taking your spouse out to dinner is a good example of a maintenance award, or maybe a weekend camping trip (which works very well for me). Include a small savings plan in your budget for this type of reward, say about $ 50 a month or so. I would suggest you isolate this money; don’t put it in your savings accounts, investment accounts. Instead, just get the cash and put it someplace you can look at it often. This allows you to fantasize a little about the reward, which increases your pleasure. And rather than rewarding yourself every month, make this significant by doing every 3 to 6 months.

The second reward is a milestone award. This is something you give yourself when you reach a specific target, suggest as paying off a big debt, or reaching a certain income.

Treat this as a bonus. Put an item in your entertainment category, possibly, to pay for this reward. If you are using the envelope technique to manage your spending, you could put any left over money into this fund. I would suggest opening a second savings account, like a Christmas fund account, to hold the money for this reward. Then, when you reach the milestone, buy that big new television, go on that cruise you’ve been wanting to do, reward yourself.

Why?

You might be asking yourself, why should I do this? Isn’t the reward of financial freedom big enough to work? Why spend the extra money?

Quite frankly, no, the ultimate goal of financial freedom is not enough. A financial freedom plan takes years, typically, to accomplish. Unless you are incredibly strong willed, you cannot keep going years without some payoff; I know I can’t. So, give yourself some incentive to reach the milestones. Take time to indulge yourself, a little, before you get back into the fight. Again, to use the military as an example, combat soldiers get leave to go to town and have a good time. They do this because it works, it keeps the soldiers motivated. Don’t treat yourself like a monk, but as a soldier. You’ll get better long term results.

“A man may, if he knows not how to save as he gets, keep his nose to the grindstone.” Benjamin Franklin

“The amount of money you have has got nothing to do with what you earn. People earning a million dollars a year can have no money and people earning $ 35,000 a year can be quite well off. It’s not what you earn, it’s what you spend.” Paul Clitheroe

“A penny saved is a penny earned.” Benjamin Franklin

In order to live a successful life and not having to worry about going broke in either your personal life or in your business then you have to budget wisely and not live above your means. You can make millions of dollars but if you do not budget those millions wisely then it will be like you have not made any money.

It is important to keep ahead of your budget and develop a plan for you to invest each month in your business and in your personal life.

Out of all of the money that you earn plan to invest a percentage of it for each of the different things that you want to do in order to make you get the maximum happiness out of your life.

It is also true that you should never just pour out money foolishly without researching and doing your homework about where that money will be going in the first place before you make the investment. You need to make sure that you will get a good return on your investment because you do not want to continue to throw more money than you have to work with out on a lot of investments that do not working out in the long run.

There are many celebrities and people who have earned a lot of money and then they get to a point where they do not know what to do with it all so they go off and get into debt and get hooked on bad habits such as gambling, drugs and alcohol because they can’t control the fantasy style life that they live and they end up in a bad position because they cannot control themselves and live within their means.

The people who have the best all around lifestyle not only work smart to earn a lot of money along as a result of following their desires and imaginations but they also live smart and invest in the right places so they do not go over their means.

Nobody can afford everything they ever want and that is why it is important to make a list of what is important to you and your business and find ways to efficiently and effectively budget for them. When you do this you will get what you need in order to make you happy!

Find a way to make a budget that will set your course for the future. The further that you budget into the future then the more financially strong you will be in the long term. You should still always be open to make changes and revise your financial plan and budgets along the way because changes will happen along the way and if you do not make the necessary changes along the way it could cause competitive harm or financial harm due to the fact that you are not doing what it takes to keep up with the current economic forecasts and shifts in your income and keeping an innovative image for your business and yourself along the way.

Some people get to financial success by generating millions of dollars in income but many have not stayed there and that is why it is very important to always have a smart budget and financial plan available for you to fall on and that will b able to guide you to a happy lifestyle and a successful business. You could earn a lot of money but blow it all away very quickly as well and get into enormous debt and that is why it is vital to live within your means and have a budget to protect you from going overboard and out of your means.

What is a budget? In the United Kingdom a budget is an itemized statement that reflects the financial status of the U.K. for the coming fiscal year. It contains proposals for spending, for tax purposes, and is presented to the nation in a speech delivered by the Chancellor of the Exchequer. It compares to the State of The Nation speech by a U.S. President. Another meaning of the word budget as found in the dictionary is: a plan specifying how the resources, especially money, will be allocated or spent during a particular period. It can also mean the total sum of money set aside or that will be needed for a specific purpose.

There are a few more definitions of the words budget and budgeting, but for the purpose of this article we’ll stick with those mentioned above. Budgeting and having proper budgets can produce less stress. And the absence of stress leads to a healthier more pleasurable life.

Yet, there are hundreds of people in the world today who have never made a budget of any sort. To them the question of budgeting remains a situation of laissez faire; let the coin fall as it may. They prefer to let life’s event take their natural courses without personal intervention.

Whether one sits with pen and paper, or places a laptop on their legs, knowing where you stand financially is of utmost importance. You need establish a budget in preparation for the rainy day. The safest way to build a nest egg for the future or build an emergency fund is to establish a budget. Some say you need to set aside 3 months of cash for those unforeseen circumstances.

We spend money like there is no tomorrow In Shakespeare’s Hamlet, old Polonius warns his hard-headed son Laertes about the pitfalls of borrowing and lending; in other words, the dangers of incurring debt.

It is from this passage of literature that we find the quote “Neither a borrower nor lender be”. When you lend money to a friend you run the risk of losing both the friendship and the money. In today’s world, our biggest cancer is not of the physical kind, but of finance – debt.

Now, almost four hundred and fifty years later, we as a people have all but totally ignored the advice of Polonius. We continue to borrow money left, right, and center. We have become a nation of spend-thrift people. We spend money like there is no tomorrow. Millions of families have no savings for their children’s college fund; no savings for vacations; no savings for general upkeep; and no savings for retirement.

The majority exist from one paycheck to the next. How sad will it be for those who will reach age 90 and still find the need to fill out applications and submit resumes for employment? With all the great medical advances present today, we continually add years to life, but not life to years. Some have even become cynical to the idea of frequent physical exercise. They rely on medication for their survival. Maybe it is due to the quality of home entertainment that we have largely become a sedentary nation. The potency of television programming very much outweighs the desire to shed the extra pounds.

There is no budgeting for weight loss. So we keep spreading at the hips and elsewhere. The budget you act upon today could save a life. The life you save could be your own.