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Creating a Capital-Budget Tool

(February 2005) posted on Thu Feb 10, 2005

What is a "good"? decision and what is a "bad"? decision?

click an image below to view slideshow

By Marty McGhie

The decisions you make regarding the acquisition of assets are
a key component of your company's success. When it comes to
capital expenditures, poor decisions will usually cause a drain
on productivity"?and can dearly cost a company on the bottom
line. Conversely, good buying decisions can propel sales and productivity
upward, thus creating profits and positive cash flow.

But what is a "good" decision and what is a "bad" decision? To
help you make that judgment, let's put together a tool for taking a
more systematic approach to capital-expenditure decisions.

A matter of priorities

Begin by compiling a "wish list" of capital expenditures that will
enable your business to remain competitive this year. Include in
your list the assets that you
need to buy, as well as
those you may just want.
Ideally, your needs and
wants don't stray too far
apart. For instance, we all
want a new sports car, but
you probably don't need
one for the business. (A
sample capital-expenditures
tool has been posted
with this article at www.bigpicture.

When compiling this list, make sure you include your key
people in what should be added. Invariably, you will find that
your management and the production employees will have differing
views on which assets may be the most important.
Nonetheless, their insights and feedback will prove to be a great
resource in the decision-making process.

Once the list is complete, review it with those who helped
compile it. Then, label each acquisition either "A," "B," or "C," with
the "A" purchases being the most important, "B" being less
important, and "C" being the least important. Assign the proper
cost to each potential acquisition"?but don't confuse the priority
labeling with the cost of the asset. For purposes of this list, cost
and priority are not related. In other words, there may be some
very inexpensive assets that you desperately need and, hence,
are assigned an "A" rating, while a piece of very expensive
machinery or equipment may get a "C" assignment.