Capital budgeting is an intricate process that a company follows to make the most out of it. The capital budgeting process needs enough decisions making which must be correct and closely followed. Capital budgeting has the power to either make a company hugely profitable or destroy the business entirely. That is why it is a very important process a business must master to obtain steady growth and profit from it.
There are some fund-related and strategic issues in capital budgeting. Depending on the specific needs, the three levels of capital budgeting can be broadly classified into the following −
Operating Capital Budgeting
Strategic Capital Budgeting
Administrative Capital Budgeting
Let us discuss each of these capital budgeting decision-making in detail.
Operating capital budgeting decisions include minute activities that the lower and middle level of management can handle easily.
It does not take too much funding and is not so important for the firm.
An example of operating level decision-making is whether to buy office equipment or not.
These decisions are often related to the day-to-day activities of the company and often do not need training or expert-level knowledge.
Strategy plays a major role in making decisions that are critical and consume enough funds.
The strategic budgeting processes often require expert-level knowledge, and the lower management level cannot handle such situations.
Specific needs that may arise in this category may include whether to expand the business or enter a new market.
The decisions made in this category cast a significant influence on the business of a company.
The strategic influence of a firm is important because the steps followed in strategic management have the capability to build or destroy the businesses.
Administrative capital budgeting contains administrative tasks such as controlling the budget or expenses and managing the new product and expansion strategies.
The decisions of this category are semi-structured in nature and may have additional options, such as an option to delay projects.
Administrative budgeting is very complex in nature, as it needs enough experience and ideas about the specific business cases to handle the situations arising out of decisions made during the capital budgeting process.
Generally, the senior management is offered to take charge of solving or continuing with the decisions made in this category.
It is notable that all three steps mentioned above are important for a firm that is into capital budgeting. Normally, companies use capital budgeting for growth and expansion, and hence, the above-mentioned steps must be taken seriously by a company to meet its present and future needs.