Report on the Capital Budgeting Decision Process

REPORT ON THE CAPITAL BUDGETING DECISION PROCESS

1. Summary

This study was to examine ways in which the finance function can contribute to an optimal capital budgeting decision process within the company. The mail findings are go through the capital budgeting decision process, discuss the aim of financial management, review the investment process and suggest the best practice design of decision process.

2. Introduction

As the limited capital fund, the company can not finance all project, so the company must choose the most profitable project to maximize the profit. Thus, one efficient system should be adopted for the selection. However, is the company just makes profit? It will discuss in following finding.

3. Finding

The following capital budgeting process is based on Arnold, G. (2008) Corporate financial management.

3.1 Generation of idea

It is significant step of investment process, company need to continuing find the ideas which may be profitable investment opportunities. Many company lack of system for idea generation, so they may lose many potential opportunities forever. In those situations, some staffs get some ideas, but they may hold back their ideas, because they take high risk for practice and their career prospect may also affect by mistake. Therefore, the companies should be change their attitude, they should be proactive and develop a system for idea generation that encourage the staffs issue their ideas which may be profitable opportunities. In addition, the company should respect those ideas whatever development of new product, improvement of existing products etc. 3M's "15 Percent Rule" is the most famous encouragement system for idea generation, 15% working hours of the staffs can use freely whatever just daydream, they can study of their interest thing and apply for research cost in any department, so everyone in the 3M may become developer.

3.2 Project development and classification

Development phase is the transformation of ideas to proposals, much information will be required on this phase. Many company adopt bottom up approach,