Whether starting own firm or go to business is Capital Budgeting or Not

Whether starting own firm or go to business is Capital Budgeting or Not

The decision to start your own firm and go into business can indeed be thought of as a capital budgeting decision.  You only go for it if projected returns look attractive on a personal and financial basis.   Formally, capital budgeting is described as the process of planning expenditures that generate cash flows expected to extend beyond one year.  The choice of one year is arbitrary, of course, but it is a convenient cutoff for distinguishing between classes of expenditures.  Examples of capital outlays are expenditures for land, buildings, equipment and for additions to working capital (e.g., inventories  and  receivables)  made  necessary  by  expansion.     New  advertising campaigns or research and development programs are also likely to have impacts beyond one year and come within the classification of capital budgeting expenditures.

Practically speaking, the firm is an investment project, so the decision to go into business is a decision to fund a capital budgeting project.  Both monetary and nonmonetary benefits are often vital considerations.  Nobody can afford to finance a money-losing  operation indefinitely,  so self-finance  businesses must cover out of pocket costs and a reasonable rate of return on investment.  Still, many entrepreneurs are attracted by the opportunity to Arun their own show,@ and take some of their overall pay in the form of nonmonetary benefits, like work schedule flexibility or personal satisfaction.


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