Keep It Flexible

• Avoid being locked into one capital budgeting and assessment approach such as a return on investment analysis. Using this method alone does not consider other important aspects such as the risks and benefits of a capital project. For example, the return on investment from manufacturing a new product could be low; however, if producing the new product allowed for entry into a profitable market, this could merit a capital expenditure.
  
  

Company Objectives

• The budgeting process should be supportive of effective executive decision-making regardless of the measurement criteria. Company objectives and the strategic plan should be reviewed when considering a capital budget item. Does the item support company objectives or is it contrary to objectives? In considering multiple projects, analyze and decide which ones best support corporate goals.
  
  

Adverse Consequences

• Consider potential adverse consequences of approving a capital budget item. If there is a possible downside from the investment, what is the likelihood of the downside occurring and what would the potential impact be on the company? For example, if a capital budget were allocated to developing a new market and the project would take ten years to complete, consider the probability of market conditions changing during that ten-year period.
  
  

Involve a Diverse Group

• Involve different stakeholders in the business in the capital budgeting process because each will have a different perspective. For example, a marketing executive is more likely to consider how an investment can expand sales and permit entry into new markets. A manufacturing plant manager may focus on how an investment could reduce operating costs. A diverse perspective will result in better capital expenditure decisions.
  
  

Budget Review

• Don't assume that once a capital budget item is approved that it can't be changed. If it no longer makes sense to pursue or continue investing in a budgeted item and the impact is significant, then consideration should be given to canceling the project.