Category: Economics

Introduction

This paper tackles what the relationship is between long – range planning and capital budgeting. It also discusses the three phases in which a project’s cash flows are organized.  Long-range planning is the forecasting and organizing activities for the realization of the envisaged goals or objectives. It involves the inclusion of all the aspects to be covered under the scheme and provisions made for their acquisition and operations. It therefore means the determination of goals and the activities of operations for their achievement. It entails forecasts made into the future and organization of events in the present for the execution or realization of the predetermined goals.

Capital budgeting on the other hand involves the decisions concerning the acquisition and allocation of funds to various sectors of the project having established the relevance or worthiness of the expenditures. It involves use of different valuation methods to determine the economic reasonableness of investing some amount on a project. There exists a strong relationship between the two terms; in the process of long-term planning, forecasts on the various amounts of funds to be utilized are considered. It is through capital budgeting, that it is possible to tell whether some investment is worth undertaking or not. Where it promises a return, then it is planned for and where a good return is not guaranteed, the project or investment can be abandoned (Steven, 2003). Therefore capital budgeting is done prior to approval of funds for the long-range planning.

Phases

In a project cash flows are in three phases depending on the activities in each level or stage.

  • The first is the planning and zoning. This involves expenses incurred to get approvals from the local authorities concerning the development project to be constructed.
  • There is the construction phase also. In this level, expenses are made towards the actual construction of the project. This encompasses costs of materials, professional fees and labor costs.
  • The last phase is the post construction stage that majorly constitutes the incomes accruing to the project after completion and the expense incurred by the finished project. The incomes can be from rent collections or if owner occupied, it would be the incomes generated from the business or the cost of alternative accommodation for similar properties.

Expenses would include service charges like insurance, security, cleaning and repairs and maintenance. In project development, it is vital to diligently examine and evaluate the long-range plans and then do the capital budgeting to gauge the profitability of the project before implementation. This would give an informed decision that guarantees a good return to the investor.

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