Fundamentals of Capital Budgeting and Financial Modelling

I’m intented to explain fundemantal structure of Capital Budgeting herewith. Financial Modelling step is the natural inevitable outcome after the budgeting process. You may find more detailed explanations later in the article.

Capital Budgeting

Capital budgeting is the process that companies use for decision making on Capital Projects those projects with a life of a year or more. It is accepted that, real capital investements of a company describe the company better than its working capital or capital structure. Valuation principles used in capital budgeting are similar to the valuation principles used in security analysis and portfolio management.

Outlines of Capital Budgeting Process

  • First of all investment ideas need to be generated. These ideas could be bring through top to bottom or bottom to top. Idea generation process is quite important step but most of the books or experts overlooking it.
  • Generally these ideas need to be compitable with the company’s overall strategy or expertise. And it also must consider the projects’ timing. Some projects may look good when considered in isolation but maybe undesirable strategically. Because of financial and real soruce issues, the scheduling and prioritizing of projects is important.
  • In post-auditing process, actual results are compared to planned results any differences must be explained.

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