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Capital budgeting can be a major investment for businesses with a highly profitable return. Managers use capital budgeting decisions to prepare and control long-term projects that need a large amount of company resources. In the article, “Overconfidence and Resistance to Abandoning Unprofitable Capital Budgeting Projects: The Effects of Autonomy, Internal Audit, and Accountability,” internal audit reports are the most effective way to reduce the number of abandoned profitable company projects (Jermias 2020). Managers also feel more confident in their projects if they are allowed to choose their own. They are more likely to see it through if they have selected the project themselves. However, managers still need to compete for the resources used to fund the projects because there are limited resources available. It is essential for companies to choose each project it will fund wisely, especially if they will be abandoned before completion.
There are many factors to consider when developing a capital budgeting project to fund. Once managers receive approval for funding, they assume responsibility for the entire project and how it will impact the company in the long term. They need to compare the expected versus the actual outcome of the project once finished. Capital budgets can be intimidating, especially if the company has a reputation for abandoning projects. Since capital budgeting activities take so much time to complete, managers review current projects to evaluate their effectiveness. They also consider if any modifications are needed or if the project should be terminated. Capital budget projects can be difficult to see through to the end, but a manager’s reputation is linked to how often they complete these largely funded projects.
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