ARTICILE WRITE-UP: “Theory of Capital and Investment Decision”

When we talk about capital in a firm or any size of an enterprise are, such as
small, medium and micro enterprise. Capital is the most important aspect of
every organization. This concept advocates for proper capital allocation and
investment in a successful projects or ventures in order to increase the
organizational efficiency. This theory will explore more about the selection of the
most suitable investment projects, most efficient allocation of capital, assessing
the efficiency of capital and minimizing the possibility of under capitalization or
over capitalization. Capital was the number one source of the business
organization, capital is not only reflect as a money, because money can not
create output (goods or services) but it is only for purchasing input to produce
output. Rather, capital is a durable resources that are man-made. Being able to
start up a business that the owner already have his or her available resources
are the greatest key to more likely to have good operations, investors or having
the level of amount of fund to be invested. Business owners, managers or the
other users of the business financial information should be able to determine the
capital structure. Capital structure is the specific combination of a debt and the
capital that a company uses to fund its overall business and growth. Generally, a
capital structure is a how will a company fund its all operations and business
growth. In economics, Capital Theory is refers to a study of economic models
that shows the correlation between the current economic decisions and their
implications. It exemplifies how many of the components of an economic theory.
Including as production, demand, distribution, and so on, interplay in a dynamic
setting. To create more goods and services we need to undergo a production
process and we need the factors of production but in order for us to settle in this
set-up we need to have our capital structures. To begin with joining big projects
we need to have our investment decisions. This is associated with the fact of
deciding the capital structure of the business. It involves taking the long term and
short - term capital investment decisions of a firm and determining the cost of
capital. The managerial economists make use of this information to plan the
capital outlay as capital in an important input and one of the factors of the
production.

Every business organization will always want to achieve goals given a specific
time horizon. It will always be the number one goal of the business organization
is to boost their operations or increase their market share, they will frequently
want to achieve a specific level of income over a target period. However the
ultimate question regarding on this matter is how will the business organization
will possibly make their company to cope up to the certain goals and objectives
that they wanted to achieve? Would there be tools to use? Any methods to take
that would aid by the managers? What the number one business firms’ objective
is to maximize their profits and by one of its major influence is their performances
regarding on their investment. Investment is the act of investing more money or
purchasing something that generate more income. In order for the investors or
the managers for be able to plan properly about this set up is going to be one of
the major cause of a capability to have more investments opportunity. This is
when Investment Decision will come in. Investment decision plays a major part of
a capital structure. Investors will also mainly widen the idea of selecting a type of
asset that will going to invest with in the selected project or firm. It is an important
strategy the manager will have or the investors, for them to be able to come up
with a good plan and assumption for the possible outcome of their investments
and to boost their operational performance. The type of asset that being
mentioned are the Capital budgeting and Working Capital Management.
Investors frequently conduct investment analysis using fundamental analysis,
technical analysis, and gut instinct. Investment decisions are frequently aided by
decision tools. Capital Budgeting is a type of asset that are long term, or it is a
long term investment to be made by the top management of a firm or just some
of ordinary investors. This is where the investors or the managers going to
budget for a large-scale initiatives with the long term implications. Thus,
managers will always has to choose a project that will benefit or have the means
of a return rather than the cost of such a project that the manager will invested to.
To elaborate, we have the example of such purchasing a new equipment for a
business and/or for introduction of the business new products. Replacements or
renovating in a business buildings, offices, etc. Capital budgeting is also a
method for calculating the financial viability of a capital investment across its
entire lifecycle. Capital budgeting, unlike some other methods of investment
analysis, focuses on cash flows rather than profits.(hofstrand,2022) In addition to
Capital Budgeting method, there are found two techniques to evaluate more of
the managers investment proposals or projects. These are the traditional method
this are the means or emphasizing the desirability of a manager over the
investment project that will based on its useful life and the expected returns and
the discounted cash flow method this is the idea of taken into consideration of the
present and future flow of incomes. Payback Period method this is where managers
going to use for it will give them the idea of how long the it takes to recover the
initial cost of the business, and the Net Present Value Method and many more.
To sum up, capital budgeting is a tool for the business capital decision making,
this is where the investors will frequently monitor their invested funds in a project
or in business firm or in any other profit-seeking organizations. This is because
investors will always have to be aware of the cash flow of the project that he is
invested to, if they will have the expected return of funds. He should compare
actual and planned results and explain why they vary. As a result, a thorough
comment is necessary to detect systematic errors in the planning process and,
as a result, enhance firm operational performance. Given the issue facing in the
business will result to the big problem of the operations in the business. An idea
of the owner to earn more but at the same time facing financial difficulties? How
will they able to come up a solution for it? A working capital management will
come to this way. This refers to the effective administration of the business’s
current resources such as cash, accounts receivable, inventories and their
current liabilities such as their short term payables. Over this working
management capital, managers will be able to conduct a risky performance in
order to give a positively contribution in the business organization. The managers
need to perform is to balance risk and profitability that comes along to the current
assets and liability of a company. Working capital under current assets constitute
the part of investments that circulates in a type to any other in undertaking the
regular route of a business. An example for this are, purchasing goods
(investments) at face value for sale, that are eventually being converted to a
receivables because it was sold to an account and then again, transforms it to
cash because the receivables are being collect. Current liabilities of the business
organization are part of working capital management considering that these are
the short term payables of a company, the means of maturing in less than a year.
One of the working capital management objectives is to ensure the liquidity of the
business organizations. When a business are not sufficient enough to cover their
short term obligations by virtue of unable to collect all the receivables, low
income will may lead to delayed payment to employees, supplies and the others.
The other major objective of the working capital management is to ensure the
profitability of the company. Funds tied up in running capital have a tendency to
earn little, or no, go back. Hence, an organization with a excessive degree of
running capital can also additionally fail to attain the go back on capital employed
anticipated with the aid of using its it investors. Subsequently, managers main
role is to ensure the profitability and the liquidity of the business, then working
capital management is like a tool for them to be able to have the means of
effective management of current assets and current liabilities. Business
organizations will always remembers the importance of the working capital
management and its trad-offs. It will always be working capital management is
the key to get higher return of capital, improvements in credit profit and solvency,
and others. It will always be the business owners, managers and the primary
users of a financial information will be the one who will come up a better idea to
cope up to their goals and objectives.

Subsequently the source of the operations of the business are the business
Capital. Capital is the durable resources that the company have in order to come
up with the goods and services that generate income and boost operational
performances. In order for the managers to be able to control the capital of the
business is to ensure that they are generating more income that will cover up the
cost of capital. What important the most in the business is to have the maximum
profit in their target period of time. It will always be their goal and will always go
to a thorough process to get there. To come up with the idea of widening more of
their income is the most influence of the investment proposals. Business
organizations will always look up and ensure the investment proposal they are
going to give a fund to if they are going to receive the expected amount of
returns. Managers should frequently use the investment analysis, using the
fundamental analysis, technical analysis, and gut instinct. Investment decisions
are frequently aided by decision tools. Investment decision will be the second
step of the investors to be more knowledgeable enough to properly deal with the
investments opportunity that will come through. Investment decision plays a
major role of a decision making a managers and investors. The proposed and
planned will be their estimated act of conducting such assumptions and come up
with a solution for the investments projects that they are selected to invest to.
Managers and investors will always has to choose a project that will benefit or
have the means of a return rather than the cost of such a project that the
manager will invested to. That is why Capital Budgeting and Working Capital
Management come with the phase. This will be their key of more likely to know
how they could possibly act in the regards of their investment proposals. Aligned
with monitoring the invested proposals income, if the investors could possibly
and positively will generate income to, and the means of evaluating the potential
of the major projects. Like a such of the net of the working capital, this is the
means of the difference between the business organization’s current assets
exceeds the current liabilities has the positive working capital, if the current
liabilities on the other hand exceeds the level of the current assets of the
business organizations this means they have the negative working capital.
Managers and other top managers should always make decisions and develop
an activity and plan to ensure that the business is not only making good profit but
it is not also facing financial difficulties. The firm should always have to cover the
cost of capital since it will always be a way of achieving their certain objectives.
Working hard is one of the act that we future accountancy and you a business
owner aspirants that we should be always shoulder because we will never have
to meet the success if we are not working hard and ensuring the best that can
give us the best return, the best results.
References;

(Business Finance, 2017)

(JARGONS, 2022)

https://www.extension.iastate.edu/agdm/wholefarm/html/c5-240.html
(HOSTRAND,2013)

https://mbalibraby.blogspot.com/2021/04/managerial-economics.html?m=1
(BLOGGER,2021)

https://commerceiets.com/scope-of-managerial-economics/#gsc.tab=0
(MAHAJAN,2022)

https://www.investopedia.com/terms/c/capitalstructure.asp (TUOVILA,2022)