Why?

1. Net Present Value- This approach considers the time value of money for as long as it generate cash flow. It uses the investor’s required rate of return to calculate the present value of future cash flow.
2. Payback Period- This is a calculation of how long it takes to get your original investment back.

How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?

Finance Leaders can be more effective by being more of a strategic partner within the organization and placing a greater emphasis on adding value. In the past finance leaders delivered data and results and now they are contributing to decision making activities, forward thinking skills and providing more strategic analysis of reports. They can deliver insight into the business by providing the information users need in an accurate, effective manner, gain buy in for a greater organizational role and elevate skills within the organization.

What can be done to make sure everyone understands the connection between the strategy and the capital budget? A disconnect between the budget and business strategy can result in lackluster budgeting and poor strategy implementation, which could spell doom for a business. So it is important to ensure that all your executives bring diverse insights to the table. They should be well aware of how strategy and financial forecasting are related to business policies and how their role in the company affects its success. Second, working out a place for the budget in the long-term plan, rather than just the annual plan, ensures that the budgetary aspects align with the organizational goals. It also gives the annual budget the much-needed impetus to be a significant part of the overall growth strategy. Finally, measuring the success or failure of the budget is important as it lets you know how effective/ineffective it has been. Identifying the key performance indicators (KPI) is essential to measure it. Communicating the metrics that define success to teams enables them to determine whether they are on track and empowers them to modify to their plans accordingly. Financial empowerment is the key to aligning the budget with the company strategy. The robust financial health of your organization can go a long way in contributing to the development of the company strategy and can become a major force in its implementation.

References

1.https://smallbusiness.chron.com/three-primary-methods-used-make-capital-budgeting-decisions

2.https://sfmagazine.com/post-entry/july-2016-how-controllers-become-business-partners/

3.https://www.entrepreneur.com/article/240664

Here is my post for this week.

Which metrics and methodologies are the most useful when evaluating a capital investment? Why?

The most common metrics and methodologies when evaluating a capital investment are the payback period, the net present value (NPV), and an evaluation of the internal rate of return (IRR) (Woodruff, 2019). Constraint or bottleneck analysis (also known as Throughput Analysis) is another methodology that focuses on how to maximize use of the bottleneck operation (Bragg, 2017). According to Bragg (2017), Constraint analysis is favored over NPV because is the method that allows management to identify capital budget proposals that will increase the throughput of a company’s entire system and allow them to provide such proposals with a primary consideration (Bragg, 2017).

The methodologies used in capital budgeting are useful because they enable an organization to select projects and capital investments that add value to the company. Furthermore, Capital budgeting creates accountability and measurability (Pinkasovitch, 2020).

How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?

Finance leaders can work closely with business leaders to ensure the methodologies for evaluation contain the correct data and the analysis is conducted accurately when evaluating capital budgets. Finance leaders should ensure business leaders have a clear understanding of the organization strategy, risk management framework, and the overall capital budgeting process and requirements.

What can be done to make sure everyone understands the connection between the strategy and the capital budget?

The best way to make sure everyone understands the connection between strategy and capital budgets is properly document the strategy at all levels, document goals and objectives, and develop a set of guiding principles and requirements that must be follow and met during the capital budgeting process. As my younger brother likes to say, “Clear expectations, no excuses.”.

References

Bragg, S. M. (2017). The CFO Guidebook. Centennial: AccountingTools, Inc.

Pinkasovitch, A. (2020, October 7). An Introduction to Capital Budgeting. Retrieved from Investopedia Corporate Website: https://www.investopedia.com/articles/financial-th…

Woodruff, J. (2019, March 6). Three Primary Methods Used to Make Capital Budgeting Decisions. Retrieved from Chron Corporate Website: https://smallbusiness.chron.com/definition-capital…

JWMI 540. Week 6 Lecture Notes.