“All family businesses engage in capital budgeting—even if they don’t realize it,” says CFA Travis W. Harms. But not all family businesses have a disciplined approach to capital budgeting.
In short, capital budgeting is the process businesses use to assess and then select major long-term investments. In a family business, the managers and directors are stewards of the family’s capital. As such, they allocate the capital to projects that will—hopefully—provide a risk adjusted return.
Harms argues it’s best to think of capital budgeting as a continuous process. There are five steps in this process—and you can follow along in this video. Be sure to watch until the end. Harms describes common pitfalls family businesses face when capital budgeting.
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