What is the difference between capital budgeting and working capital management?
13th June 2012 From Germany, Stuttgart
Working capital management deals with the organisation's short term assets and its short term liabilities. The main purpose of working capital management is to ensure that the organisation is to continue its operations with sufficient ability to satisfy matuing short term and upcomming expenses.The management of working capital involves managing inventories, accounts receivable and payable, and cash. it deals with the day to day expneses of the organisations.
Capital budgeting is also known as investment appraisal & it is a planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.
14th June 2012 From India, Thane
great answer.....
thxxx to you show me interest and valuable answer
you answer is related to the working capital management and capital budgeting between differnce in the form of concepts,theroy,introduction,object,feature and etc.....right
i want answer in the form of practical orinented and asepects of the business
plz reply
14th June 2012 From Germany, Stuttgart
Capital Management and Capital Budgeting
Capital management and capital budgeting looks at the types and uses of external capital and the usual sources of such capital.
Types and Sources of Capital
Capital management and capital budgeting to finance a business has two major forms: debt and equity. Creditor money (debt) comes from trade credit, loans made by financial institutions, leasing companies, and customers who have made prepayments on larger-frequently manufactured orders.
Equity is money received by the company in exchange for some portion of ownership. Sources include the entrepreneur's own money; money from family, friends, or other non-professional investors; or money from venture capitalists.
Debt capital, depending upon its sources (e.g., trade, bank, leasing company, mortgage company) comes into the business for short or intermediate periods. Owner or equity capital remains in the company for the life of the business (unless replaced by other equity) and is repaid only when and if there is a surplus at liquidation of the business - after all creditors are repaid.
Acquiring such funds depends entirely on the business's ability to repay with interest (debt) or appreciation (equity). Financial performance (reflected in the Financial Statements) and realistic, thorough management planning and control (shown by Pro Formas and Cash Flow Budgets), are the determining factors in whether or not a business can attract the debt and equity funding it needs to operate and expand.
Business capital can be further classified as equity capital, working capital, and growth capital. Equity capital is the cornerstone of the financial structure of any company.
Equity is technically the part of the Balance Sheet reflecting the ownership of the company. It represents the total value of the business, all other financing being debt that must be repaid. Usually, you cannot get equity capital at least not during the early stages of business growth.
Working capital is required to meet the continuing operational needs of the business, such as "carrying" accounts receivable, purchasing inventory, and meeting the payroll. In most businesses, these needs vary during the year, depending on activities (inventory build-up, seasonal hiring or layoffs, etc.) during the business cycle.
Growth capital is not directly related to cyclical aspects of the business. Growth capital is required when the business is expanding or being altered in some significant and costly way that is expected to result in higher and increased cash flow. Lenders of growth capital frequently depend on anticipated increased profit for repayment over an extended period of time, rather than expecting to be repaid from seasonal increases in liquidity as is the case of working capital lenders.
Every growing business needs all three types: equity, working, and growth capital. You should not expect a single financing program maintained for a short period of time to eliminate future needs for additional capital.
As lenders and investors analyze the requirements of your business, they will distinguish between the three types of capital in the following way:
1) fluctuating needs (working capital);
2) needs to be repaid with profits over a period of a few years (growth capital); and
3) permanent needs (equity capital).
17th September 2019 From India,
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