What is capital budgeting, what does that have to do with your business investing?

Capital budgeting is a process that is used to determine whether or not certain projects are worthwhile investments.Another term for capital budgeting is called an "investment appraisal."Just as you would put a certain value on a pair of socks or a car, you should put a value on an investment.If, in your business, you are responsible for the capital budgeting decisions you will need to assess whether or not the costs of an investment exceed or fall short of your earning goals.Before you spend your time and money on a business investment, you will want to use capital budgeting to make sure that your decision is going to make you and the company money.

Capital budgeting is a type of quantitative analysis done by business managers to provide support for their making of investment decisions.If done correctly, capital budgeting can analyze the benefits of an investment over time, the risks of that same investment over time and the cost of the investment decision over time.Capital budgeting is also a financial planning tool (as the term "budgeting" suggests).Capital budgeting involves the development of a financial model that accounts for all the possible benefits, losses, and costs.These factors are then represented in an organized and easy to understand format.The whole point to the capital budgeting process is to create a simple way of explaining the most important variables in a business investment decision over both the short and the long term.

Although conceptually capital budgeting is simple to understand, creating a capital budget has some definite challenges.Accounting for costs, benefits and projected profits can be difficult simply because certain aspects of the investment deal weigh more heavily on the decision to make that investment deal, than do others.Most benefits in capital budgeting can be classified in one of two ways.

The first way to classify benefits in capital budgeting is to create one category for benefits that affect levels on the profit and loss statement directly.These benefits would be considered hard benefits.These hard benefits include such things as improved net revenue or improved profit margins.

The second classification that you should have in your capital budgeting of benefits is to specify benefits that may not be as easily measured on a statement of profit and loss.These types of benefits are called soft benefits and include such things as increased productivity or improved communication levels.

Capital budgeting involves more than just being able to crunch numbers.It is true that you should not ignore the hard facts of a business investment, but it is sometimes the intangible or hard to quantify benefits that really make a business investment worthwhile.You cannot rely solely on numerical analysis and planning.There is a definite strategy that you have to be able to employ if you are going to get ahead in the world of business investing.

When it comes down to it, in order to do well in investing business dollars you are going to have to have the ability to evaluate both the hard numbers and the soft ones in order to produce a realistic capital budget.The decision making process can be very difficult, especially when your reputation, business experience and job are on the line.Business investing is usually a more significant investment than that which would be made by the average individual simply because there are more financial resources available to a business.

Having the insight to be able to see investment risks and weigh them against potential investment benefits is definitely easier said than done.But with some training and an understanding of the importance of capital budgeting, business investments can be fun and lucrative.