Financial Planning & Capital Budget

Business owners are responsible for managing several different functions in their company. Corporate finance is a tool owners and managers use for financial planning and capital budgeting. Financial planning contains several processes that business owners follow when accomplishing various goals. Capital budgeting is a method that companies use to find the most profitable long-term investments or major acquisitions for improving business operations.


Financial Planning Facts

Business owners usually follow several steps in the financial planning process. These steps include assessing the business environment, reviewing the company’s mission and objectives, identifying new expansion or business opportunities, determining the availability of economic resources, and creating a budget for each business opportunity. Owners use these steps to carefully outline goals and objectives for their company to achieve in the business environment.

Capital Budgeting Facts

Capital budgeting involves several corporate finance formulas to assess the financial return of business opportunities. These mathematical calculations provide business owners with a quantitative analysis using internal and external financial or economic data. Business owners use corporate finance formulas to take the guesswork out of making important decisions. Capital budgeting also may use qualitative analysis, if absolutely necessary, based on information relating to the decision. Qualitative analysis is the owner’s or manager’s personal judgment regarding decisions.


Types of capital budgeting formulas include net present value, rate of return and other similar formulas. The net present value formula estimates future cash flows from business opportunities and discounts them back to today’s dollar amount using an expected rate of return. This calculation ensures future cash inflows are higher than present cash outflows. The rate of return calculation is similar to net present value, except that it focuses on the interest rate of each decision rather than dollars.

Financial planning and capital budgeting often work in tandem. As business owners set goals and outline specific plans for achieving business objectives, they often use quantitative and qualitative analysis before making business decisions. Capital budgeting tools provide the necessary analysis information for each goal or objective in the financial planning process. Business owners combine these business management methods to ensure that they properly evaluate the financial return of business decisions rather than accepting opportunities for the sake of potentially growing the business.


Small business owners can use financial planning and capital budgeting for obtaining external financing from banks or investors. Most small businesses need some form of external financing for starting and growing operations. Because small businesses may not have a strong financial history, financial planning and capital budgeting help banks and investors review the business owner’s commitment to the business venture.