Disadvantages Of Capital Budgeting

Capital budgeting or capital expenditures or investment is paramount in any practice. It is the chief determinant of a successful practice. A well-crafted capital budgeting decisions are central to the financial security of a firm. It is one of the crucial decisions that will be made by the owners of any practice. The acquisition of assets such as land, equipment, and buildings is included in capital budgeting and entails financial burdens to the practice. As a result, adequate planning of the budget to avoid financial hardship is very advantageous (Prather, 2009).

Moreover, future strategic decisions on the acquisitions of expensive assets with limited marketability and liquidity can be constrained by capital budgeting. To make a sound capital budgeting decisions that will lead to financial success, it is vital to consider the large capital requirements, illiquid and long-lived assets, and the effect on the prospective strategic decisions and operations of the practice (Prather, 2009). Prior to creating a budget, the start-up capital has to be determined. This is the capital needed to finance the production of goods and services, including sales until the break-even point is reached. Inadequate start-up capital leads to unsuccessful business and closure within

When determining the business budget, it is important to prepare several types of budgets in order to get the desired precision. The budgets are then combined to generate a pro forma financial statement that allows the office manager to predict the financial position and result of the operations. The following budgets can help the manager to have a better view of what the financial position of the practice will look like in the future. These include statistics budget, operating budget, capital budget, and cash budget (Keagy & Thomas,