Capital Expenditure
Steel plant is considering building a new arc furnace, an insurance company is planning to install a computer system. All these situations involve a capital expenditure decision. Capital expenditure also referred to as a capital investment or capital project. This involves a current outlay and future outlay of funds in the expectation of a stream of benefits. A capital expenditure from the accounting point of view is an expenditure which is shown as assets in balance sheet. It is governed by certain conventions, by some provisions of law, and by the management's desire to enhance or depress reported profits.
Capital expenditure of importance
Capital expenditure decisions often represent the most important decisions taken by the firm. Their importance stems from three inter related reasons: -
- Long term effects – The scope of current manufacturing activities of firms is governed largely by capital expenditures in the past. Current capital expenditure decisions provide the framework for future activities. Capital investment decisions have an enormous bearing on the basic character of a firm.
- Irreversibility – The market for used capital equipment in general is ill organized. Some types of capital equipment, custom made to meet specific requirement, the market may virtually be non-existent. A wrong capital investment decision often cannot be reversed without incurring a substantial loss.
- Substantial Outlay – Capital expenditure usually involves substantial outlays. For example, an integrated steel plant involves outlays of several thousand million capital cost tend to increase with advance technology.
Capital expenditure difficulties
Capital expenditure decision is extremely important; they also pose difficulties which stem three principal sources: -
- Measurement problem – Identifying and measuring the costs and benefits of a capital expenditure proposal tends to be difficult. Capital expenditure has a bearing on some other activities like cutting into the sales of some existing product and improving the morale of workers.
- Uncertainty – It is impossible to predict exactly what will happen in the future. Hence, there is usually a great deal of uncertainty characterizing the costs and benefits of a capital expenditure decision.
- Temporal spread – The costs and benefits associated with a capital expenditure decision are spread out over a long period, usually 10-20 years for industrial projects and 20-50 years for infrastructural projects. Such a temporal spread creates some problems in estimating discount rates and establishing equivalences.
Market Demand
Market demand is defined as the total amount of purchases of a product or family of products within a specified demographic. The demographic may be based on factors such as age or gender, or involve the total amount of sales that are generated in a particular geographic location. Assessing market demand is one of the most important ways that businesses decide what to sell and how to go about selling the products they produce. Properly assessing the market demand for a given product is very important. Failure to accurately project the desirability of a good or service can lead to production levels that are in excess of the number of units that will actually be sold. As a result, the company is left with a huge inventory of finished goods that generate no profit at all.
In some cases, failing to project market demand properly is enough to force a company to go out of business. The most common way to evaluate the desirability of goods and services within a given demographic is to implement a structured market demand analysis.
Essentially, this process seeks to identify consumers who are attracted to the products enough to actually purchase them. As part of the market analysis, the research helps to identify the size of the market. This makes it possible to determine if the company needs to cultivate consumer interest in a particular demographic in order to generate new business or cultivate several different markets concurrently as a means of remaining profitable. Because market demand can change over time, companies invest resources in constantly checking the current status of consumer wants and needs. This ongoing process often allows companies to remain competitive with other businesses that also target the same markets, as well as keep the interest of current customers by making improvements to existing products and possibly introducing new products that are also of interest to those same customers.
Determinants of market demand
- The size of the market. Ceteris paribus, a larger market means more demand, and a more outward market demand curve.
- The various determinants of individual demand, averaged across all economic actors in the market.
- The distribution of each of the determinants of individual demand across all economic actors in the market.
Situational Analysis
A systematic collection and evaluation of past and present economic, political, social, and technological data, aimed at identification of internal and external forces that may influence the organization's performance and choice of strategies, and assessment of the organization's current and future strengths, weaknesses, opportunities, and threats.
Before developing any given marketing strategy, it is important to conduct some form of analysis. This should form an essential part of any business or marketing plan and should be reviewed over time to ensure that it is kept current. Many of my clients often ask me what factors are important when doing this.
The elements worth considering include:
- Product Situation - What is my current product? You may want to break this definition up into parts such as the core product and any secondary or supporting services or products that also make up what you sell. It is important to observe this in terms of its different parts in order to be able to relate this back to core client needs. Feel free to also discuss here which of your client’s needs your product is meeting.
- Competitive situation - Analyze your main competitors – who are they what are they up to – how do they compare – feature/ benefit analysis. What are their competitive advantages?
- Distribution Situation - Review your distribution Situation – how are you getting your product to market? Do you need to go through distributors or other intermediaries?
- Environmental factors - What external and internal environmental factors are there that need to be taken into account. This can include economic or sociological factors that impact on your performance.
- Opportunity and issue analysis - Which requires conduction a SWOT analysis? Things to write down her are what current opportunities that are available in the market, the main threats that business is facing and may face in the future, the strengths that the business can rely on and any weaknesses that may affect the business performance.
0 Comments