Capital Budgeting

  

The process (usually annual) of determining which real assets (i.e., plants...not implants) an entity should invest in via purchase, upgrade, or refurbishment. Think land, machinery and buildings needed to advance the organization's strategy. In large orgs, this may start with ideas from the grunts (line managers, plant foremen, division heads) but is ultimately the responsibility of the controller and/or CFO.

Since it is only a budget, the process tends to be inexact, but generally, the projects invested in should be expected to generate a positive net present value (NPV). In theory, the highest return projects should get the first allocations of capital. Isn't that how our tax dollars get spent as well? Oh. Maybe not.

Related or Semi-related Video

Finance: What is working capital?268 Views

00:00

finance a la shmoop. what is working capital? alright people say we're opening

00:08

a lemonade stand. I seed what you did there. unfortunately we can't just blink [man stands in front of stage]

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our eyes like Aladdin's genie and you know make it all happen. magically we

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don't need a ton of money to start things but we need some money in advance. [genie comes out of lamp]

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of you know when we begin collecting revenues well we have to rent a location,

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and pay six months rent in advance, and we got to buy about 87 pounds of

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sugar and 4,000 lemons and hundred fourteen huge bottles of purified water,

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oh and cups we need eight thousand cups. all told it costs about 50 grand in

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capital, working capital. see we did there, we need before we can start to run the

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business, and you know pay employees and so on .so we get an investor TBOG. the [people stand in line for lemonade]

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bank of Grandma. yeah we love her. she gives us a hundred grand. well that

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entire hundred grand invested into our little business is our total working

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capital. right? fifty grand and start the business working and we got 50 left over

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or just in case things don't start up as quick as we hope .its capital that lets

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us start working. in cleverly named there. all right well 50 grand we know we're

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gonna spend 50 grand and cover the time in between when we're up and running and [calendar]

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revenues and all the other stuff start to kick in. and well yeah it's that

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simple. put together an actual drinkable lemonade recipe ?well that's just a

01:27

little bit harder. working capital. live it love it breathe it. [ grandma grimaces]

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