Capital Budget Planning Is Important! How Should Entrepreneurs And Managers Start?

(Capital Budget Planning) is a series of processes for enterprises to analyze, evaluate and make decisions on long-term investment projects, and is of extraordinary importance to the future development direction of the enterprise and the efficiency of capital use. When many entrepreneurs and business managers first come into contact with this thing, they always feel confused and don’t know where to start, right? Today I will talk about this and try to make everyone understand the general situation.

First of all, we must first understand what capital budget planning is. To put it simply, companies have to spend a lot of money to buy equipment, build factories, and develop new product research and development projects that take a long time to see the profits, and make a detailed plan and plan in advance. Its purpose is not to spend money at will, but to ensure that after spending this money, it can bring the most profits to the company, or to help the company gain a foothold and develop better in the market. This is the core!

That guy, there are several key steps that must be missed when planning capital budgets. If one is missing, it may cause a big mistake, causing the entire plan to go astray! Come on, I'll count it for you:

1. The generation and collection stage of project proposals : All departments and employees in the company can propose some project ideas that they think are worth investing in according to actual production or market needs, and then collect them together to prevent those good ideas from being missed... This step is very basic, but it is also very important.

2. Preliminary screening and evaluation stage of the project : After getting a bunch of proposals, you can’t just grab your eyebrows and beards and feel that it’s good, so you have to sifte them first! Let’s see which projects are consistent with the company’s strategic goals and whether there are any obvious flaws, such as the technology cannot be achieved at all, or the policy does not allow it to be done, etc., kick out these unreliable ones first!

3. Detailed financial analysis and evaluation stage : This step can be complicated. Some special financial methods must be used to estimate the cash flow of the project. What are the initial cash outflow, the future annual cash inflow, and the end-of-term residual value recovery must be calculated clearly. Then use the indicators of net present value (NPV), internal rate of return (IRR), and payback period method to evaluate whether each project is cost-effective, whether it can make money, how much money can it make, whether it is fast or not…

4. Project decision-making and sorting stage : After the analysis, there is only so much money. It is impossible for all good projects to be invested in at once. So you have to use the various indicators calculated above, as well as how much funds the company has in the overall capital. Rank these projects in a sequence and select the best combinations to invest. This process of choosing is also quite a test of people's wisdom.

5. Budget execution and monitoring stage : The project has been approved, the money has been invested, and the matter is not over yet! You have to always keep an eye on the progress of the project and see if the actual money spent is much different from the budget at the beginning, whether the project progress is behind, and whether the expected returns can be achieved... Once you find a problem, you have to find a way to adjust it quickly, and don’t wait until you can’t finish the game in the end before you regret it!

When planning capital budgets, I guess many people have questions. Here are some common trembling sentences:

How to estimate the risk ? This is indeed a headache! Basically, based on the characteristics of the project itself, such as the technical maturity, the stable and unstable market demand, and whether competitors will emerge, we use some probabilistic analysis and sensitivity analysis to predict various possible changes, and then take these risk factors into the estimation of cash flow, or simply increase the discount rate so that the project's income can cover this risk!

Which method is more reasonable for projects of different sizes or different lifespans ? If the project size is different, you can probably compare it by dividing NPV by the profit index (PI) obtained from the initial investment; if the lifespan is different, you can try to use the minimum common multiple method to make their lifespans the same length before comparing NPV, or use the annual average net present value (ANPV) indicator directly, so that you can better see which project can bring more value on average every year.

My little view on capital budget planning seems to be very theoretical and profound. In fact, it is the same as when we live with us and spend money. We must spend the money on the edge, and strive to make every penny spent, and the more you earn, the better, the faster you will be! If a company does not pay attention to this and blindly invests, the consequences will be unimaginable! So, all bosses and managers, you must not take this lightly, you must do it with your heart!