If you're trying to decide whether or not to buy a long-term asset for your business (like a vehicle, machine or some expensive software), you want to be reasonably assured that it will be worth it. By “worth it”, we mean that the benefits outweigh the costs. Capital budgeting helps evaluate the whether a long-term asset will pay off.
Corporate Finance
Capital Budgeting
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Cash Management
Most companies hold some of their assets in cash - even though cash earns no interest. Why hold cash instead of investing it in promising projects or short-term securities? Of course, one reason for holding cash is to pay for goods, services and wages. A company might prefer to pay its employees with short-term government bonds but that simply wouldn't be practical.
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Credit Management
When a company makes a sale, it can either collect payment right away in cash, or extend credit to the customer and collect payment later.
Granting credit can provide a company with increased sales but it also carries costs.
Costs of granting credit include the:
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Short-Term Financial Planning
Short-term financial planning is important for virtually all businesses - from small startups to large established businesses. Even large businesses with seemingly healthy income statements have gone bankrupt, simply because they couldn't meet their current obligations.
Short term planning helps answer important questions like:
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Long-Term Financial Planning & Growth
Smaller startups are often less concerned with long-term planning than getting off the ground and surviving. While many businesses may benefit from long-term financial planning, the more established businesses tend to have the resources and stability to analyze the long-term.
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The Time Value of Money
One of the most important concepts in corporate finance is the time value of money. This concept is crucial in areas like capital budgeting, lease-or-buy decisions, accounts receivable analysis and many others. The time value of money is the relationship between $1 now and $1 at some time in the future.
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