Qualitative Factors in Capital Budgeting Decisions

Banking & FinanceFinance ManagementGrowth & Empowerment

Qualitative factors play an important role in capital budgeting decisions. Although capital budgeting relies more on quantitative measures, there are abrupt influences of qualitative factors on capital budgeting decisions. Qualitative factors are not expressed in capital budgeting decisions (unlike quantitative factors), however, in terms of context, qualitative factors are equally important.

Qualitative Factors Vary According to Demongraphy

Qualitative factors usually change according to markets and demography where a project has to be implemented. For example, in India, the three qualitative factors that guide projects are urgency, strategy, and environment. Each of these three factors needs to be considered in the case of capital budgeting decisions taken by large-scale companies.

The importance offered to each of the above-mentioned three qualitative factors is different for different companies.

  • Some companies consider urgency to be the most relevant factor, as it offers a push to projects at an opportune moment. Urgency also lets the projects flourish under the given timeline when the project is most active. It also builds the base of a project for the managers and business owners to work on an urgent basis so that the projects don’t have to delay due to man-made errors and lateness.

  • Some other companies in India provide more weightage to strategy as the most important qualitative factor for project implementation and success. Strategy as a whole lets businesses stay prepared for all events. It offers flexibility and opportunity to investors to stay invested and change tracks when there is an utmost need for investment in other projects. Such flexibility makes the businesses lean and able to function under a tight schedule.

Intuition, Security, and Social Factors

Apart from the three factors that are followed by most organizations in India, there are some companies that stress on intuition, security, and social factors. These companies believe that organizations are run by human beings and hence all human factors must be considered in case of most useful qualitative factors.

As mentioned, the choice of qualitative factors changes with changing demography. For example, the companies in the USA consider customer satisfaction and morale, investor engagement and image, etc., as important factors. There is a consideration of the legal angle of business too that is considered by the companies in the USA.

Conclusion

It is, therefore, notable that qualitative factors play an influential role in capital budgeting decisions. They may not be as clear as quantitative factors, but they are equally important. It is especially the long-term vision and commitment of the companies that make companies rely on qualitative factors. However, qualitative factors must not be the only factors affecting capital budgeting decisions, but should be used handinhand with quantitative measures.

raja
Updated on 24-Dec-2021 11:15:35

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