Investing capital in infrastructure is essential for the long-term financial health of a corporation. While this fact is accepted by all corporate managers, the question of exactly where to invest capital can be a contentious one. Capital budgeting is the process of deciding what parts of a corporation's infrastructure and physical plant are optimal for investment.
Any large company or organization that doesn't invest in its own infrastructure will eventually begin to deteriorate. Buildings, vehicles, machinery and other assets require ongoing investment to keep them in good condition so they can continue to make a profit for the company. Before company assets can be put into growth, expansion or acquisitions, they need to be spent on the repairs, maintenance and replacements that are a constant requirement of physical assets. When companies budget capital properly, they maintain a healthy balance , avoiding both under-investment resulting in deterioration and over-investment resulting in money wasted on unnecessary projects.
When running a business, there is always a temptation to value short-term gain over long-term financial planning. Particularly in times of economic contraction, money for payroll and daily operations may be tight. Short-term gain includes quarterly profits, sales figures and the income that is used to pay staff and keep a business running. The money that is necessary for these things needs to be budgeted, but also needs to be balanced with more long-term needs.
While short-term benefits need to be maintained to keep employees and shareholders happy, it is just as important to continue an ongoing program of capital investments to maintain the long-term financial health of a company. Money that is put into capital and assets may seem to be disappearing, but is in fact adding to the value and sustainability of the company. When a corporation's buildings, vehicle fleet, infrastructure and technology are up-to-date and well maintained, that company is in an optimal position for future growth. If the company needs to be sold, it will bring a much better price when capital investments have been maintained.
Maximizing Corporate Assets
Effective capital budgeting views profit as a byproduct of overall corporate viability. An unhealthy corporation liquidates its assets and turns them into profit, while a healthy corporation creates a sturdy infrastructure that generates profits without degrading its ability to do so into the future. Investing money in productivity recognizes that tomorrow is as important as today when it comes to creating a healthy company.
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