Predicted sales levels and the business' cash generation capability are the factors investors consider in making decisions.The forces, which affect or determine demand, include the proposition or fulfilling of an existing need, pricing, macro-environmental trends, competition, seasonal characteristics, substitutes and the market.If the present and future cash outflows are likely to be greater than present and future inflows, a negative number must be calculated for that net cash flow.
The endeavor helps enhance the entrepreneur's awareness of some key drivers of revenue growth in his or her business, produce a plausible business plan and prepare him or her in answering a potential investor's questions on the market opportunities and marketability of his or her business.
However, despite the importance of forecasting, there is no set methodology that is applicable in every capital budgeting situation (Parrino, , 2009).
Net Present Value: Net Present Value, otherwise known as NPV, is an accounting term used in capital budgeting where the present value of net cash inflow is subtracted from the present value of cash outflows.
Then this value is compared with projected profit ratios for the project in the future.
This relationship is expressed by the following formula, whereby:* CFt = the cash flow at time t and * r = the cost of capital.
The total present value of a project's expected future cash flows must be enough to satisfy the initial cost to make the investment attractive.The results of the study indicate that the primary capital budgeting techniques employed by small listed companies are based on the IRR and the NPV, resembling the practices used by larger companies.Furthermore, the use of discounted cash flow techniques amongst small listed companies had increased over the last decade. Capital budgeting practices: an empirical study of listed small en medium enterprises. Capital budgeting defined as the planning process used to identify and determine if an organization's long-term investment strategy (new machinery, products, R&D, etc.) is fiscally sound, therefore worth time, investment and energy.It is a budget for major capital expenditures (Sullivan, , 2003, p. Numerous formal methodologies are used in capital budgeting, each method using incremental cash flow from each unique project.It is, in fact, the lifeblood of the business, needed to fund working capital to enable it to run effectively.Expenses and investments must be made against delays and uncertain sales levels.Keywords: SME’s, Capital Budgeting, South Africa How to cite this paper: Hall, J. Capital Budgeting Forecasting is important in modern business, moreso now that globalization is a fact and markets fluctuate more rapidly.If the NPV of a prospective project is positive, then it should be accepted.However, if it is negative, then the project probably should be rejected because cash flows are negative. Related Papers: Budget BUILDING a PROFIT PLAN Entrepreneurship 101: What is the primary goal of a person entering into or is already engaged in a business? Pages: 10 (2893 words) | Type: Term Paper | Bibliography Sources: 0 Operational and Financial Budgeting Budget Budgeting: Operational and financial budgeting and forecasting Budgeting: Operational and financial budgeting and forecasting An operational budget provides an estimate of a business' likely expenses…