It has often been a matter of managerial decision-making to state the link between strategy and capital budgeting. As capital budgeting is one of the most important decisions organizations make, the effect of strategy on them is a matter of interest for all stakeholders. The strategy may not be the only requirement that drives the capital budgeting process, but there is a very solid link between the two.
In fact, the strategy offers a higher level of screening and integration of resources in a capital budgeting procedure. It may not be accounted for in the regular accounting or DCF method, but strategy is unavoidable in making decisions for a company in the long run. Capital budgeting is a purely financial matter, so companies may have to provide the process with adequate data in order to make a strategic decision.
In order to realize how important strategy is to decision-making in a capital budgeting scenario, we must understand how the DCF technique is handy in making capital budgeting decisions. The DCF method stresses the inclusion of all cash flows occurring in both present and future and a strategy is required while using them in an optimum manner.
In fact, strategy is the structure on which capital budgeting stands. Without a solid strategy of allocation and use of cash, a project will miss its ultimate mission and hence there is a chance of going out of the tracks. The strategy holds the various components of a capital budgeting process intact. Therefore, it is very important to understand the importance of the link between capital budgeting and strategy.
It is not only the base that strategy makes to place a capital budgeting measure but also the process of running the capital budgeting methods that are important for an organization. Capital budgeting is a continuous process in terms of managerial decision-making and strategy paves the way to apply and implement the needed outlines in the process.
There are various types of decisions that must be made in a capital budgeting process, and strategy is at the core of these decisions. For example, to make the decision of capital expenditure, there may be a strategic rule to reject projects that have a higher investment limit than a certain mark. By applying the strategy, the managers would reject the project even if it seems profitable in the long run.
Therefore, strategy is an inseparable part of capital budgeting and it’s the only way to make sure capital budgeting is done with efficiency and managed with accurate policies in the future.