What Is Zero-Based Budgeting (ZBB)?

A budgeting technique that allocates funding based on efficiency and necessity rather than on budget history. The process of zero-based budgeting starts from a “zero base” and every function within an organization is analyzed for its needs and costs. The process of creating a budget from nothing without using the prior year’s budget or spending numbers.

Documentation And Processes Involved In Capital Investments

There are different segments of the business, in the financial sector. That supports the various market forces and acts as a contributor to the economy of the country. Capital investment is a vital part of every financial sector, that offers the maximum gains out of the existing resources and the present state of the market. It would be a great idea to go through the planned and professional stepwise strategy, to achieve the expected growth and sustainability for the long term. For which, a lot of processes included reaching the desired results.

Significant Process

Capital investments require various processes, in order to succeed in tune with the available sources of the financial market. The best process for capital investment is to get the funding done, it can be through private investors or commercial investors. That depends upon the kind of business network you share or rely on. So, you can invest securely and receive the gains on regular intervals. All that requires is an insight into the project, that you are going to carry on with.

Personal Approach

You can simply start the process, with the funding from the friends or acquaintances. The people who are well known to you and have faith in you, for the future aspects. This would bring them the identity of their brand names or services, in addition to your work being done in accordance with the expected outcome. You can also search for the commercial investors, ready to invest their capital in your ideas or the planning that you are working upon.

Commercial Resources

You can also approach the financial institutions or banks, for the specific capital investments. Since some of the businesses fit in the criteria of Government funding or loans, depending upon the guidelines and regulations of the financial authorities of the country. This would not only provide you with the trusted opportunities for the capital investment but also offers you with the bright chances to make maximum profits out of the same process.

Stepwise Functioning

While making the process of capital investment work, it is better to make the levels of the business perform. That can easily be done by segregation of the functioning into different steps. Among which, post planning you need to work upon the initial stage of the investment. That may be little less than the expected gains. However, would lay the strong foundation for the stage of expansion. The second stage is far more paying and consistent, towards the advanced stage of any kind of capital investments.

Essentials Of Capital Investment

The first step of capital investment needs to be taken, with the complete preparation and strategic planning. In order to achieve the hassle-free results, within an expected time frame. Such as:-

–    Legal Documentation is an inseparable part of any kind of business deals, that involves the investment-output- market forces- partners- any other capital-based resources. It is an important decision to get the agreements executed, before getting into any kind of financial arrangements with any individual or company.

–    Preparation of the Term Sheet is necessary, for setting up the terms of capital investments. Though it is no restriction or boundation for any of the parties, still most of the Term Sheets are an integral part of the capital investments initiated by the companies for the long term perspective.

–    Valuation of the firms or the business is also an essential part, in the process of capital investments. Since it provides a realistic picture of the existing status of the companies involved, in addition to the future options to gain the profits.

–    Note of Promissory can also be counted as an important part of the capital investment. As it is issued by the leading firms, who offer multiple chances and opportunities to the investors to gain the expected results faster and quicker. These notes are prepared, with the term validity and the percentage included, depending upon various factors.

–    Future Equity Agreements can also be agreed upon, for safe and secure capital investments. In order to ensure, that the investment is not at risk. Also, it doesn’t have any expiration term, so there stands no chance of capital losses for the investors involved.

Professional Approach

When the capital investment is processed, it is always advisable to form the group of professionals in such a manner that the decisions would be taken with every factor considered; as and when required. The people involved must have vast knowledge and a good deal of experience, for managing the critical situations arise in future. Such a group must be equipped with the rights and powers, to manipulate all the forces and take the most suitable decisions in a timely way. The group must consist of the members, from all the spheres representing the involved companies or individuals.

Benefits And Risks Associated With Capital Investments

Capital investments play several roles in business, however they are majorly used to purchase fixed assets such as land, machinery and business and as funds invested for business growth and expansion.  A business cannot grow unless they have good capital investments, the investments generally procured in the form of debt financing or equity financing. These kinds of investments are generally provided by financial institutions and venture capitalists.

They are generally used in long term investment opportunities which has a longer tenure and yield returns for several years in an enduring rate. These investments can be in the form of new plant and machinery, factory upgradation, expanding a business, constructing a utility and many more. Although it plays a very crucial role in the growth of the business, yet it has its own benefits and risks involved.

Let Us See The Benefits And Risks Associated With Capital Investments

Capital Investment Help The Economy

The business economy grows in a few specific ways, so entrepreneurs and business owners constantly look for an option to grow and become big. This led to the discovery of oil wells in 1850. Similarly with the advancement in technology and the advent of web technologies and the internet, the economy has grown drastically and this was reflected through improved capital goods structure and increasing capital stocks.

The growth of capital goods certainly impacts in the increase of labor productivity.  For example, the purchase of land and buildings for your business or any costs involved in the construction of a building or a structure. Similarly when it comes to technology, the human workforce is replaced by machinery and in recent ages, robots are replacing the place of machinery and most of the systems are automated.  These changes result in increased efficiency and productivity which ultimately leads to an increase in economic growth.

Capital Investments Have Adequate Control Over The Expenses

Capital expenses typically involve elements such as money spent to purchase other companies or for research and development. They normally have a substantial effect on the short-term and long term financial growth of the business.  In a nutshell, they are funds used by a business for the purchase and maintenance of long term assets that have a long lasting lifespan. It is extremely vital for an organization to determine how much you need to invest in capital expenditures. This is because of the following reasons

  • Long term financial standing: The capital expenditure decisions generally extend to the future. This is usually determined based on the forecast of the past. Apparently at the same time, current decisions also provide the structure for future projects. The capital investment decisions have a huge impact on the basic essentials of the organization
  • Irreversibility- Capital expenditure decisions are permanent and cannot be undone unless the organization faces losses. However, some are custom-made to meet specific requirements. For instance, you have purchased equipment that has no longer value in the market, after acquiring you cannot reverse the decision, the only possible thing you can do is to scrap the machinery. Here you reversing your buying decision however at the end of the day you are incurring a substantial loss.
  • Depreciation – Capital expenditures hint an upsurge in the asset accounts of a business. Nevertheless, when you have started using your fixed assets like the machinery, vehicles, eventually it starts to depreciate, and they continue to decrease in value throughout their lifespan.

After witnessing tremendous benefits of capital investments, it’s now time to see the risk associated with it.

There Are Few Risks Involved With Capital Investments

Market Risk:

It is the possibility of an investor suffering losses due to aspects that impact the overall performance of the financial markets in which the investor is associated with. Market risk also referred to as undiversifiable risk since it impacts all asset classes and is unpredictable. There are few primary sources of market risk such as interest rate risk, equity price risk, foreign exchange risk and commodity risk.

Liquidity Risk:

Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity, a company or bank may be unable to meet their short term financial demands. However, this risk can be mitigated by developing strategies and taking suitable steps.

Concentration Risk:

Also called as a credit risk in the form of lending too much to one particular customer or type. In other words, it is the ability for a loss in an investment portfolio or a financial institution during a situation, when an individual move towards an unfavorable direction.

Closing Thoughts

Capital investment basically helps to make an informed decision about an investment taking into consideration all possible options. Although there are few limitation and risks associated with it, yet they always remain as necessary for the company growth.