Capital budgeting involves analyzing, evaluating, and prioritizing investment decisions for large-scale projects that typically require significant capital from a business. This could include new office or warehouse space, fixed assets, or real estate. Capital budgeting provides businesses with a way to determine the best use of capital to increase the overall value of a business - a strategy that is useful to businesses of all sizes. With the help of NetSuite, businesses can easily handle capital budgeting but let's start with the 5 steps of capital budgeting first.
The 5 Steps of Capital Budgeting Steps
For small to medium-sized businesses, capital budgeting decisions are typically made by business owners with the support of analysis done by accountants or an outsourced client accounting service provider. However, it is always important to keep the strategic goals of the company in mind before moving through the 5 steps of capital budgeting.
Identify and Generate Projects. Collecting ideas and proposals is essential for any organization, and they can come from any source within the company. It is good practice to establish a submission process, possibly using templates, but ensure that all submissions include estimates of cash flow, costs, and benefits. It's typical for a growing business to receive numerous proposals vying for limited funds.
Evaluate Proposed Project. The next phase of the process involves evaluating the feasibility of the proposed ideas. This typically starts with a screening process to confirm that all required information has been included and that the proposer has conducted their due diligence. Often, proposals will need to be reviewed and vetted by various departments within the company, such as accounting, sales, or operations, to receive endorsements before submission. Additionally, part of the evaluation process involves determining the criteria to use for assessing the proposals, including acceptable levels of risk, hurdle rates, and spending thresholds. These criteria are at the discretion of management, with the ultimate goal of maximizing the company's value.
Project Selection. After a thorough analysis, proposals that meet the evaluation criteria and are deemed to be sound business decisions are approved. The selection process may also take into account the timing and priority of competing projects, particularly in cases where proposals surpass the company's available funding or capacity for execution.
Implementing Projects. After a proposal gets approved, an implementation plan gets created to outline crucial factors required to complete the project, such as funding details and cash flow tracking methods. The plan also establishes a project timeline with essential milestones and a designated end date. The implementation plan also specifies key individuals participating in the project and a process to handle anything that might come up during the project, like budget overages or delays.
Performance Reviews. At the end of the capital budgeting process, it is crucial to review the actual results of the project and compare them with the initial proposal. It's advisable to conduct these reviews at predetermined milestones and at the project's completion. Analyzing and learning from previous projects can provide valuable insights to inform future capital projects.
Capital Budgeting Best Practices
Focus on Cash Flow. Rather than net income, cash flow should be used when setting up and planning capital projects. Cash inflows and outflows from all areas of the business should be monitored to ensure the business remains healthy while a project is happening.
Be Conservative. Be careful not to overshoot goals and spending when estimating the potential cash inflows of a project and aim high on the cash outflows, to be safe.
Plan Timelines Carefully. Time is money and that is an important thing to remember with capital budgeting. Projecting accurate timelines of cash flow during a project is crucial for success.
Establish Processes and Procedures. Establishing a clear process for how a project will be completed, responsibility across personnel and staff members, and how things such as costs, schedules, and more are tracked should be done early on in the planning phase of a project. Having a strong backbone will help contribute to success.
Conduct Regular Reviews. Documenting and reviewing various stages of a project will allow business owners to stay in the loop with project statuses and provide data for things to possibly improve on for future projects.
Capital Budgeting with NetSuite
Capital budgeting helps businesses make better and more informed decisions regarding investing company capital into new projects. The accuracy of the data that is used in the capital budgeting process is crucial, so NetSuite's planning and budgeting capabilities can help keep everything in line.
NetSuite's collaborative tools and automation come equipped with high-level features that can enhance the most promising capital budgeting proposals early on in the process. Along with that, the software assists in monitoring actual cash inflows and outflows against the initial projections as the project progresses. Moreover, it shortens budgeting cycles while increasing the precision of forecasts.