Capital budgeting, along with investment appraisals, is used to understand what potential investments a company might take in the future, as well as whether or not they might be worth it to the business in the long term.
While there are many different techniques that can be utilized to analyze the pros and cons of an investment, the end goal is always the same: To ensure the right decisions are being made for the company, and the right resources are available to make said decision.
One of the main things a capital budget looks at is the payback period, or how long it is estimated to take to “payback” the initial investment (whether it’s new equipment, a different location, or even research and development). Knowing this can help decide how long the investment will take to be profitable to a business – which is an important aspect of any investment.
Another aspect of an investment appraisal and capital budget is to determine how the initial investment will be funded (and if it is realistic to the money the business has at the time). Businesses have a variety of funding options to choose from, including bonds, lines of credit, SBA loans, or even private loans with their own stipulations. Through the process of capital budgeting, the best funding solution is often narrowed down.
If you are unsure of what options your business has to fund its newest idea, give Advisory Capital Funding Group a call today to find the right one for you.