Discuss how capital budgeting procedures might be used by each of the following: a. Personnel manager b. Research and development staffs c. Advertising executives
There are a number of factors businesses take into account when determining whether to invest in capital improvements, for example, length of time it is expected to take to recoup costs associated with an expansion, introduction of new methodologies, or procurement of another company. In making such determinations, top level company officials assemble data from each of the disparate sectors or departments and analyze that data in an effort at arriving at the best possible conclusion regarding the financial wisdom of proceeding with proposed merger, expansion, recapitalization or other activity. Just because a particular activity promises a relatively quick payback timeframe does not mean that that option is the most financially sound for the long term. Recapitalization of a manufacturing plant virtually always entails high up-front expenditures for new equipment and for training employees on that new equipment. Concurrently, production may dip due to disruptions on the factory floor caused by the removal of older equipment and the installation of new machinery. How long it will take to recoup the costs of that process have to be considered before a decision to proceed is made, also taking into account the ability to continue to respond to customer concerns about products already out-the-door. Whether the installation of new equipment will allow for more efficient manufacturing processes with decreased incidences of faulty or defective products going out the door and whether the introduction of new technologies will allow for a reduction in personnel, with the costs associated with the latter, are also taken into account.
The research and development department of a company contemplating major capital transformations is at the forefront of those efforts. Depending upon the nature of the research and development (R&D) activities taking place at a particular firm or agency, the R&D staff may be driving the process by developing new technologies or methodologies that hold promise of radically transforming existing processes. The development of new technologies can, as mentioned, hold the promise of improving the product, providing for a more efficient manufacturing process, and reducing personnel requirements. Research and development staffs perform feasibility studies before investing capital in R&D efforts to make sure the analysis is sound and that there are no obvious flaws in the data and calculations being used. Once that review is completed, they undertake efforts at determining the feasibility of a proposed process through actual experimentation that, depending upon the nature of the technology involved, can entail considerable financial costs. Should the R&D process conclude that a new technology or process is feasible, it is up to top-level management to decide whether to proceed towards either further research and development or towards the potentially costly process of procuring the materials and tools needed to produce at the requisite scale the component or product in question.
Personnel managers can be in a difficult position depending upon the nature of the exercise. Deliberations into potential capital improvements can suggest the requirement for fewer employees; discussions regarding mergers or acquisitions of other companies can result in redundancies that require trimming of staff, or can create the requirement for added personnel; an addition of a new sector or department intended to improve productivity can require additional personnel, for example, if a decision is made to perform “in-house” an activity that had previously been contracted out to another company. Conversely, a decision to eliminate a department because financial calculations demonstrate that the work can be done cheaper by another company will result in an elimination of jobs once the tasks previously performed by the company’s staff are shifted to another, less expensive option, usually a subcontractor with lower overhead. Personnel are “overhead”; they are costs that are factored into discussions of profitability and efficiency. When those costs can be reduced or eliminated with a subsequent reduction in productivity, then personnel managers have the task of offering “buy-outs” or firing employees outright.
Advertising is a component of a business’s expenses that are determined during preparation of budgets for following fiscal years. How much money is allocated for marketing is a product of how competitive the environment in which the business in question is operating and how important is the need to appeal to a particular constituency. Even monopolies, when they were allowed to exist due to the unique function they provided – the telephone company being the classic case during an era when few could envision more than one such company serving the public – find it necessary or desirable to advertise in order to generate positive sentiments among the public, especially following a product recall or scandal of some sort. Subcontractors or businesses that cater to a very narrowly-defined market may only advertise in trade publications oriented towards a small constituency. Manufacturers of scuba diving equipment, for instance, reserve their advertising dollars for publications that cater to scuba divers and snorkeling aficionados. Spending money advertising to the public at large when only a small percentage of a population partakes in a particular activity is a waste of money.
Within the context of capital budgeting procedures, advertising dollars may be used to announce the introduction of a new product, or to educate the consumer base on the fact of a merger or acquisition. Marketing designed to ingratiate a company with the public may confront the challenge of changes or transformations that upset a constituency accustomed to a product or process being performed a certain way. One of the greatest and most infamous corporate miscalculations in history was the 1985 introduction by the Coca-Cola Corporation of “New Coke,” a modification of an old and revered product that seriously upset Coke’s existing constituency. By the time the company had backtracked from this ill-considered decision, the damage had been done, with the phrase “New Coke” now symbolizing similarly ill-considered corporate decisions by other companies. Advertising executives are responsible for smoothing out such bumps in the road and staying ahead of corporate decisions that could require public relations exercises or changes in marketing strategies.