What is a capital budget?

The capital budget It is the process of planning, determining and evaluating possible investments or expenses that are usually large within companies. These investments or expenses incorporate projects related to the construction of new plants or the investment of new long-term undertakings.

Through this type of process, company managers look for a way to identify, develop and evaluate any investment opportunity that generates profits for the organization. The evaluation is carried out when the cash flow required to invest in the surplus assets needed to carry out the project is verified.

Characteristics of a capital budget

The capital budgets They have a series of characteristics such as the following:

1	They allow making the necessary changes in the means of production, once they are conducted adequately the investment policy linked to diversification, growth, reduction and the restructuring.
2	It facilitates the balance of financial sources, related to the investments that the company will carry out.
3	Provides possible alternatives that can match the current business market.
4	It provides, together with the operating budgets, the possibility of making provisional financial statements.
5	With this budget, the financial policy of the company can be completely changed.
6	It allows an optimal financial structure, by providing its own and other resources correctly and with a low cost of capital.

Goals of a capital budget

A capital budget has the ability to identify and track all the expenses that a project requires. Within this budget, it is determined how the payment of the project will be made and in turn when the investment can be recovered.

In this sense, the company intends to achieve some objectives such as the following:

Determine financial sources

The capital budget can give details of the project's expenses and where the money to be invested in the project is coming from. On the other hand, funding sources can incorporate a capital investment account, bank or government loans, cash, stock offers, and non-profit donations profit.

A project constantly needs a combination of these sources, since the budget execution of capitals determines the amount of money that each source needs and the value of this mode of financing.

Determine the scope of the product

In this type of budget, project planners can determine the financial system of a project, since this is specified In advance of the execution of the project, it defines the amount of money that the company has to make the investment in each of its aspects.

Similarly, this budgeting process explains how long the project can last, due to the budgets you have to get the work done and potential downtime.

Determine the payback technique

This technique is essential within the capital budgeting processThis is due to the fact that companies that are waiting to acquire new equipment, buildings or renewals, will eventually make the payments themselves and some will be canceled more quickly than others.

As there are different ways of calculating the amortization technique, the budgeting process will be forced to determine the modality that will use the company in advance, in the same way, you must identify the estimated time that the company will have to recover its investment.

Steps to make a capital budget

To perform the capital process, the following steps must be taken into account, so that the company achieves favorable results:

.	Proposal design: The capital budgeting process can be carried out at all levels of the company and supervised by financial professionals. In the event that the proposals require greater investment, they should be supervised more carefully than those with less investment.
.	Monitoring and analysis: Financial professionals carefully monitor and analyze in order to evaluate all the benefits that investment proposals generate.
.	Decision making: Most companies have a financial budget that could limit investments in the future, therefore, it is the responsibility of the management to authorize these budgets.
.	Execution: Once the executive command authorizes the budget, both the payment and the execution of the project will take place.
.	Follow-up: It is important to follow up on the results of the project and make the real comparison of costs and benefits with what has been planned, in case they arise

Advantages and disadvantages of capital budgeting

Due to the advantages and disadvantages that are generated when using this tool, it is necessary consider the positive impact that this process has on the analysis and decision-making in a investment. Its advantages and possible disadvantages are listed below:

Advantages of capital budgeting

.	Has the ability to establish objectives, goals and results that lead to the success of the project.
.	It is a tool that can be put into practice with total ease.
.	It helps to identify where, what, when, who and how project activities should be carried out.
.	It helps to properly control the use of resources.
.	Contingency plans can be created when making changes or adaptations to the project.
.	It detects any economic unforeseen in advance and in this way any difficulties could be prevented by taking the necessary measures in time.

Disadvantages of capital budgeting

.	It allows the influence of those executing the budget process on the potential result.
.	If the discount rates are different in each of the periods, it is necessary to specify it in a spreadsheet or do it by hand.
.	It requires the knowledge of financial professionals to be able to develop this budgeting process.
It is very important to be very careful with discounted rates.

The capital budget It is a favorable tool that allows to develop and decide in the execution of an investment project, in addition to measuring the real results that consider the success of the project.