Page 59 - IMDR MSME BOOK 2021

Managing Finance in Micro, Small & Medium Enterprises
Micheal J Sheal (Aug 2019) states that “The speed limit
on a road provides a benchmark for evaluating driving
speed decisions. Lines on a soccer eld provide
benchmarks for evaluating passing decisions. Normal
vital signs of body function provide benchmarks for
evaluating decisions on whether to go to the hospital.
The benchmarks are critical because without knowing
the appropriate benchmark, the decision-maker is
unable to distinguish good outcomes from bad
outcomes.”
Capital Budgeting
Capital budgeting is a company’s formal process used for
evaluating potential expenditures or investments that
are signicant in amount. It involves the decision to
invest the current funds for addition, disposition,
modication, or replacement of xed assets. The large
expenditures include the purchase of xed assets like
land and building, new equipment, rebuilding or
replacing existing equipment, research, and
development, etc. The large amounts spent for these
types of projects are known as capital expenditures.
Capital Budgeting is a tool for maximizing a company’s
future prots since most companies can manage only a
limited number of large projects at any one time.

Capital budgeting usually involves calculation of each
project’s future accounting prot by period, the cash ow
by period, the present value of cash ows after
considering time value of money, the number of years it
takes for a project’s cash ow to pay back the initial cash
investment, an assessment of risk, and various other
factors.