Capital Budgeting Techniques for Small Business
03

Feb 2020

A small business is a significant part of a country's economy. These small businesses provide business opportunities to budding entrepreneurs and help in the creation of meaningful jobs. In a country like UAE, they form the backbone of the economy. According to the UAE Ministry of Economy, they account for more than 80% of the private sector workforce and comprise more than 50% of the country's GDP.

One of the most critical processes which a small business needs to conduct is capital budgeting. The capital budgeting will help in planning all the future projects of the company. Let’s know more about this process.

Capital Budgeting

The complete capital budgeting process is fundamental and will allow the management to make the best possible decision which will affect the future of the company. Capital budgeting is a planning process which will be used to choose the future projects of the company. With proper capital budgeting, the management of the company can decide which future projects will add value to the company and start working on the project. Capital budgeting will involve transactions relating to acquiring land or purchase of fixed assets.

When a company has to make a capital budgeting decision, the management uses specific methods which will determine if the transaction will be profitable. Once the company determines that a particular project is beneficial, the company can go ahead with the project. One of the biggest goals of capital budgeting is to increase the value of the company and in turn, increase the value of the stakeholders of the company.

Capital Budgeting Techniques

When running a small business, there are specific considerations which need to be kept in mind of the entrepreneur. These techniques will ensure that proper steps are taken for capital budgeting. The steps are given below:

1.Finding Opportunities

Finding the opportunity is the first step towards appropriate capital budgeting. This step can be considered as a brainstorming issue as you will have to identify all the business opportunities irrespective of the final result. In this step, you need to make a list of all the business opportunities that we can explore.

2.Proper Evaluation of Opportunities

After the management prepares the list, it is required that all the possible business opportunities are evaluated. Once all the business opportunities are written in a single place, it is easy to find out which chances are not feasible. We can outright dismiss some options, and on conducting the required research, some more options will be disqualified. In the end, we need to keep the possibilities which meet with the mission and vision of the company.

3.Performing a Cash Flow Analysis

Every entrepreneur and businessperson will understand the need of having a constant flow of cash in and out of business. By conducting a cash flow analysis, we need to figure out which option will provide us with the how much returns and help in the decision making as to which option will be much more profitable for the company. It should be taken care that the management should always use the figures from less than the best scenario as the best scenario rarely happens.  

4.Consulting an Expert

By consulting an expert, you will not make the little mistakes that will affect your company in the long run. Asking a person who has done these types of projects or has provided consultations regarding such projects will be very helpful for the company. Consulting an expert will also help the company in choosing better projects and bring in better revenue.

5.Choosing a Project

When all the steps are done, the management will choose a project which will provide the most revenue. The choosing of the project should make financial sense.

A small and medium enterprise needs to have proper capital budgeting techniques. These techniques will allow a company to prepare for its future and help in choosing the projects which will rake in more revenue.

If you are looking for help in capital budgeting, do take a look at the services provided by JAXA Chartered Accountants. JAXA will understand your business and offer you a solution to your business problem accordingly. Want to know more about the services of Jaxa? Contact us – we’d be happy to help.