Thursday, November 4, 2010


Capital Investments Planning and Control

Capital Rationing

Asian companies, by and large, do not have to reject profitable investment opportunities for lack of funds, despite the capital markets not being so well developed. This may be due to the existence of the government –owned financial system, which is always ready to finance profitable projects. Asian companies do not use any mathematical technique to allocate resources under capital shortage which may sometimes arise on account of internally imposed restrictions or management’s reluctance to raise capital outside. Priorities for allocating resources and determined by management, based on the strategic need for and profitability of projects.


It may not be feasible in practice to specify standard administrative procedures for approving investment proposals. Screening and section procedures may differ from one company to another. When large sums of capital expenditures are involved, the authority for the final approval may rest with top management. The approval authority may be delegated for certain types of investments projects. Delegation may be effected subject to the amount of outlay, prescribing the section criteria and holding the authorized person accountable for results.
Funds are appropriated for capital expenditures after the final selection of investment proposals. The formal plan for the appropriation of funds is called the capital budget. Generally, the senior management tightly controls the capital expenditures. Budgetary controls may be rigidly exercised, particularly when a company is facing liquidity problem. The expected expenditure should become a part of the annual capital budget, integrated with the overall budgetary system.

Top management should ensure that funds are spent in accordance with appropriations made in the capital budget. Funds for the purpose of project implementations made in the capital budget. Funds for the purpose of projects implementation should be spent only after seeking formal permission from the financial manager or any other authorized person.

In Asian, as in UK, the power to commit a company to specific capital expenditure and to examine proposals is limited to a few top corporate officials. However, the duties of processing the examination and evaluation of a proposal are somewhat spread throughout the corporate management staff in case of a few companies.

Senior management tightly controls capital spending. Budgetary control is also exercised rigidly. The expected capital expenditure proposals invariably become a part of the annual capital budget in all company. Some companies also have formal long range plans covering a period of 3 to 5 years. Some companies feel that long range plans have a significant influence on the evaluation and funding of capital expenditure proposals.

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