Cash Outflow Cash Inflow: (Not Expense) (Not Income)

Capital Budgeting
Cash Outflow is at present date (Not Expense) Cash Inflow is at a Future date (Not Income)
Any such decision is a Capital Budgeting Decision. Involves a particular process to be followed. Like all other investment decisions, this also involves a cost and a benefit. Has various investment appraisal methods. Has various tools to measure the future cash inflows at present date.
Capital Budgeting Process

Identification of potential investment opportunities Assembling of proposed investments. Decision making Preparation of Capital budgets and appropriations. Implementation. Performance Review.
Principles to evaluate Costs & Benefits

Cash Flow Principle Incremental Principle Long term funds Principle
Interest Exclusion principle

Post tax principle
Techniques of Investment Appraisal

Discounted Cash Flow Method (DCF) Internal Rate of Return Method (IRR)
Discounted Cash Flow

Time Value of Money Cost of Pure ghee 10 yrs. back was Rs. 60 / Kg. and what is the rate today Rs. 190 / Kg. Value of Money falls over period of time. What is the present value of Rs. 100 that the company is going to receive in future ? Discount Rate Present Value Initial Cash Outflow Net Present Value.
Internal Rate of Return

IRR simply speaking is the point of No Profit No Loss. At this point the Cash Outflow today is equal to the PV of all the future cash in flows. IRR is the discount rate used to convert the future cash inflows into their present value. Here it is assumed that the cost of capital is known. Here the net present value is set to 0 to determine the IRR.
Budget & Budgetary Control

Capital Budgeting is just a small part of overall budget exercise that an organization works on. What is a budget ? Why budget ? (Strategy, Planning, Appraisal) Departmental Budgets (Responsibility Budgeting) Master Budgets
Framework for Budgeting

Profit Centre Responsible for revenues, costs & profits. Cost Centres Responsible for various costs and expenses. Budget Committee sets the basic model for budgeting. Budget Base how to start, what to follow ? (Zero Base Budgeting) Concept of Limiting Factor.
Departmental Budgets
Sales Department Budget (what, where, how much to sale and at what price) Production Department Budget (what, when & how much to produce and at what cost) Material & Purchase Budgets (What, when, how much & at what price to procure) Labour Budgets (Qnty. & Qlty. Of labour and labour rates)
Manufacturing Overheads Budget (activities and related expenses involved in production) Non-Manufacturing cost Budget (admin and organizational activities involved and related expenses) Finance Budget (quantity of funds, quality of funds and cost of funds)
Master Budgets
Clubbing up of all the departmental budgets. Taking into consideration management aspect on all these budgets. Impact of all these budgets on the Profit and Loss accounts and Balance Sheets of the organization. Submission of the budgets to the top management for approval. Once approved, practically implementing the budget.
Costs
Cost structure of an organization. Fixed Costs Immaterial of production (Eg. Salaries, wages etc.) Variable Costs varies with production (Eg. RM Cost, electricity etc.) Semi Variable Costs Fixed to an extent but beyond that level varies with production (Eg. Light bill) Why set budgets for costs ? Budgeting variable costs ? How ?
Budgetary Control
Budget as benchmarks. Implementation of budget operational implementation. Periodical comparison of actual performance with budgets set. Variances

What ? How much ? Why ? Corrective actions.
Variance Analysis
Actual Performance vis--vis Budget set. Variance in actual as per the benchmark set. 2 Basic parameters of variance:
Quantity Variance Price Variance
Both types of variances are quantified in terms of amount of impact on bottom line. Variances are analysed in light of the given environment and situations.
Budgeting & Performance Appraisal

Concept of Responsibility Budgeting. The whole department looked on as a team and not as individuals. Departments actual performance against budget. All the members of the department appraised on the basis of this comparison. Though, this is just 1 parameter of appraisal, but, this is perhaps the most important.

Cash Outflow Cash Inflow: (Not Expense) (Not Income)

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Cash Outflow Cash Inflow: (Not Expense) (Not Income)

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Capital Budgeting

Capital Budgeting Process

Principles to evaluate Costs & Benefits

Interest Exclusion principle

Techniques of Investment Appraisal

Discounted Cash Flow

Internal Rate of Return

Budget & Budgetary Control

Framework for Budgeting

What ? How much ? Why ? Corrective actions.

Quantity Variance Price Variance

Budgeting & Performance Appraisal

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