Saturday, December 25, 2010

(243)---CAPITAL BUDGETING DECISION MAKING LEVELS

Capital Budgeting Decision Making Levels

For planning and control process, three levels of decision making have been identified:
  • Operating capital budgeting
  • Administrative capital budgeting
  • Strategic capital budgeting


Capital budgeting decisions could be categorized into these three decision levels.

Operating capital budgeting


This may include routine minor expenditures, such as expenditure on office equipment. The lower or the middle level management can easily handle the operating capital budgeting decisions.


Administrative capital budgeting


This involves medium-size investments such as expenditure on expansion of existing line of business. Administrative capital budgeting decisions are semi-structured in nature, and they may also involve some options, such as option to delay. Generally, the senior management is assigned the responsibility of handling these decisions.


Strategic capital budgeting


This involves large investments such as acquisition of a new business or expansion in a new line of business. Strategic investments are unique and unstructured and involve simple or complex options, and they cast a significant influence on the direction and value of the business. Top management, therefore, generally handles such investments.


Keeping the view the different decision making levels, capital expenditures could be classified in a way, which would reflect the appropriate managerial efforts to be placed in planning and controlling them. One useful classification could be:

  1. Strategic projects
  2. Expansion in the line of business
  3. General replacement projects
  4. Expansion in the existing line business
  5. Statutory required and welfare projects


Further, each of these categories could be sub-classified according to funds required by the projects.


Corporate strategy provides the focal point for the firm’s long run strategic planning. The capital budgeting system, particularly for large strategic projects, is determined in the context of strategic planning and, thus it is a top-down process. Corporate strategy and strategic planning play the most crucial role at the identification and evaluation phases. Operating and administrative capital budgeting decisions can be decided at lower/middle level management within the overall strategic framework and guidelines from top management. The capital budgeting system at lower/middle level will largely be a bottom-up process. It may be noted that external and internal environment provides a context to the company to establish and review its mission’s concerns, and multiple objectives, which, in turn, shape its corporate strategy.

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