Techniques to exercise control over Capital Expenditure
The accepted or selected proposals may be obsolescence due to advancement in technology in the short run.
Therefore, investment made in fixed assets cannot be recovered very easily even though the project is implemented after considering profitability. In other words, the heavy investment in fixed assets affects the profitability of the firm in the long run i.e. before end of the economic life of the project.
1. Continuous Search for New Methods, Processes and Products: A management can find new methods, process and products through trial and error method or through research and development process. If so, the investment in fixed assets may not be affected the long term profitability to some extent.
2. Planned Development: A sound organizational structure should be established for analyzing, screening and implementing various capital expenditure proposals. If so, there is a possibility of planned development of all the departments of the firm through capital budgeting.
3. Capital Budgeting: An expected sources and uses of funds may be prepared in a statement form. If so, how much amounts received and used for a specific period is known to the management. In this way, capital expenditure controlled through capital budgeting. Hence, capital budgeting should be invariably followed in he firm.
4. Use of Rational Methods of Evaluation: The selected evaluation method should be rational one. It considers input and output along with non financial matters also. The available resources of the organization are properly utilized for wealth maximization. It is possible only through using of rational method for project evaluation.
5. Progress Record: A proper progress record should be maintained to demonstrate the progress made by a capital expenditure. A capital project sheet should be maintained for each project for this purpose. The estimated expenditure and actual expenditure should be compared and variances should be collected.