Difference Between Capital Budgeting and Capital Planning

Difference Between Capital Budgeting and Capital Planning-23

In the modern world, most of the day to day decisions of a normal business include basic marketing & operational activities such as how to approach a customer, how to increase market reach, how to take the business online, how the stores shall be arranged, and how many employees are needed for a smooth running of the business, etc. However, such businesses are also required to make other essential decisions such as capital budgeting and planning. These 2 terms, i.e. capital budgeting and capital planning are often used synonymously. However, they are not the same. In the given article, we will try to differentiate between capital budgeting & capital planning.

Capital budgeting is defined as, how businesses choose the best investment alternative to ensure growth and high profitability. It refers to identifying and evaluating large projects that provide cash flows over a period longer than a year. It helps an organization to decide whether or not an organization should fund a specific long term investment. It is the process to evaluate potential major projects or investments. Such methods are often used where a big long term investment is made such as procurement of new machinery, construction of a new plant and acquiring other businesses. Capital budgeting involves the valuation of a company’s lifetime cash inflows and outflows from a project to determine whether the decisions of investing in that project are feasible or not. On the other hand, the process of capital planning tells you where the money for capital projects comes from. It includes preparation of a detailed portfolio by evaluating predicted cash flows, asset values and withdrawal plans. It also provides a roadmap to meet the goals and objectives strategized by the businesses. Capital planning contains several processes that business owners follow while accomplishing various goals. It is the is a comprehensive evaluation of an organization’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans.

Capital budgeting, thus, determines what investments an organization makes by evaluating the expected cash inflows, initial outlays and scrap value of the asset after expiry. Whereas, Capital planning deals with the questions of how this selected investment would be funded after evaluating an organization’s overall cash inflow, cash outflow, asset values and withdrawal plans.

What Is the Debt-Snowball Method?

Debt Snowball Method

Legendary investor, Warren Buffet has called the power of compounding- the eighth wonder of the world. Compounding is the process in which an asset’s earnings are reinvested to generate additional earnings over time. This return can be in the form of interest, dividend or capital gains. Compounding can be explained as interest on interest- the effect of which is to magnify returns to interest over time, this is also known as the “miracle of compounding”. This can very well be understood by the example of a snowball.

Have you thought what happens when you push a small snowball down a hill? When you push it down a hill, it continuously picks up more snow. By the time it reaches the bottom of the hill it is a giant snow boulder. While falling downhill it gets bigger with every revolution. The same happens with money, if you invest INR 100 for 2 years at 10% compound interest p.a., at the end of 1st year you have INR 110. Now, for the second year, the whole INR 110 is reinvested. So you get interest in this INR 110. Therefore, you get INR 121 at the end of the second year.

It is not a secret anymore that you can grow the money you save by investing it to earn a return. You can make your money grow faster if you reinvest the returns along with the principle amount. Various investments like savings accounts, fixed deposits, recurring deposits and bonds pay interest. Such investments provide you with clarity as exactly how much money you’re going to earn. Here, you still benefit from compounding by reinvesting your earnings on other investments, like stocks, mutual funds and exchange-traded funds.
Additionally, Rule 72 is a highly used method for understanding the application of the power of compounding. It is a technique to identify at what period would a particular sum of money double it at a given rate of interest. It requires you to divide the number 72 by the rate of interest. For example- if you invest a sum of money in a fixed deposit at an interest rate of 8% p.a. it would take 9 years for you to double the amount (72/8).

8 Best Reasons to Continue Your SIP

Reasons to Continue Your SIP

In these abysmal times of ongoing pandemic and unstable market dynamics, the markets have been highly affected due to the investor consternation and fall in demand. It is said that around 59 lakh SIPs have been stopped, however, it has been observed that at the time when many SIPs have been either stopped or paused there has been additional inflow made by some investors cushioning the SIPs inflow. We would like to suggest some reasons you should consider before deciding whether you should continue your investment in SIPs or not.

Lower Valuation
One of the prime causes leading to the discontinuation of SIPs is the fall in the values of your investment. Before going more into this let’s briefly talk about the nature of the bearish phase that the country is going through at the moment. The important characteristic of the bearish phase is that it is temporary and after the end of such phase there is always a bullish market where the overall market is highly satisfying. This means that currently, the stocks are available at lower prices than what they were at a month ago. Such circumstances could be seen as a chance to invest in more units at lower costs.

Constant Benefits from Power of Compounding
Known as the 8th wonder of the world, Compounding is one of the major reasons to continue investing irrespective of the market volatility. By making regular investments and reinvestment of the returns generated on such investment, the power of compounding helps the investors in making contented returns.

Essence of long-term growth
The markets have always been volatile and subject to uneven fluctuations, however, one thing that has always been static in this environment is the immense potential for wealth creation. It is said that in the past 40 years irrespective of multiple recessions and downfall of the economy at various situations the investors have gained an overall 16% compounded annual returns in S&P BSE Sensex since its inception.

Lack of Re-Investment Alternatives
If one decides to withdraw the funds there should be an alternative for the use for such finds otherwise the main objective of investing it in the first place won’t be accomplished. If the sole reason was the factor of fall in markets it is advisable to consult your professional fund manager before making any rash decisions. 

Opportunity to earn more
As discussed earlier the bearish phases do not sustain for long, which allows you to buy some good stocks at currently low market prices but apart from this there is an additional chance of averaging out the total cost of portfolio. It is highly possible that due to high market prices you might have overpaid for your holdings and now could be a good time to make up for the additional costs incurred.

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