Capital Budgeting, Budgeting and Working Capital Strategies

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Accounting paper

Capital Budgeting, Budgeting and Working Capital Strategies

Due: December 1, 2008

California International Business University, San Diego

Accounting, CIBU 631

Lee White (MBA)

Table of content

1Introduction3

2Background and meaning4

2.1Budget4

3Capital budgeting5

3.1Capital budgeting techniques7

3.1.1Net Present Value7

3.1.2Payback Period9

3.1.3Modified Rate of Return10

4Budgeting Process11

4.1Analytical Tool13

4.2Performance Measures14

4.3Business Control Cycle14

5Working Capital Strategies16

5.1General Electric: Hedge and Swap Strategies17

5.2Cisco: Technology obtains best practices in working capital management18

5.3Delphi: Lack of Cash Flow Management.20

5.4Singapore Airlines: Importance of Cash Budgeting and Cash Management.21

6Analysis of Working Capital Best Practice24

7Conclusion27

1Introduction

This paper attempts to highlight the importance of capital budgeting, the budgeting process and benchmarking for working capital strategies. Many managers use different techniques in order to identify the right budgeting strategy. The capital budgeting analysis techniques we look at include IRR, NPV, Pay back Period and MIRR, because most managers use more than one method of evaluation. The first part of the report talks about the meaning of budget and capital budgeting. It will define various techniques used in capital budgeting. The second part will show the budgeting process more detailed. Often budgets are met within a short time and without the intensity it should be. In many cases, managers believe that the process is too long and that it does not really help them to run their departments or business. In this paper I will try to explore the various stages of the budgeting process and evaluate their effectiveness. After that I will have another look at how the role of the budget could be used as an analytic tool in order to evaluate organizational performance, eliminate inefficiencies in an organization's performance, and be a part of the business control cycle. How can a company go from point A to point B? According to Leading Edge Alliance, a budget can be compared to a roadmap for business growth or driving directions (2007). The third part will talk about the importance of the benchmarking working capital strategies. In addition to a explanation I will try to outline different techniques based on some real work examples. At the end I will sum up the important points of capital budgeting and the budgeting process which should give an interesting overview of both topics.

2Background and meaning

2.1Budget

What is a budget? A budget is used as a planning tool that describes/shows a company's available resources and the way these resources can be used in order to achieve the mission and the objectives of the organization. It may also be viewed as a written form of communicating the future plans of the organization through the allocation of its resources [Troy’s study(As cited in the Norvell 1994, 23).] For public or public traded companies a budget is not only to help allocate resources but also to gain funds. To explain it in the simplest way, a budget is a plan every company should have in order to see how it spends and saves money. Please see here a simple but typical marketing expense budget: (http://articles.bplans.com/common/gifs/QA/bplans/SimpleExpenseBudget.gif)

3Capital budgeting

Capital budgeting takes care of the allocation of resources, but it mainly encompasses large ticket items that could not be paid for with the organizations’ available resources over a short period of time, such as one year. Due to the dollar cost of items contained in a capital budget, more attention during the creation of a capital budget is focused on future trends affecting the organization and on the benefits and costs associated with each capital budget item [ Post,...
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