Qualitative factors play an important role in capital budgeting decisions. Although capital budgeting relies more on quantitative measures, there are abrupt influences of qualitative factors on capital budgeting decisions. Qualitative factors are not expressed in capital budgeting decisions (unlike quantitative factors), however, in terms of context, qualitative factors are equally important.
Qualitative Factors Vary According to Demongraphy
Qualitative factors usually change according to markets and demography where a project has to be implemented. For example, in India, the three qualitative factors that guide projects are urgency, strategy, and environment. Each of these three factors needs to be considered in the case of capital budgeting decisions taken by large-scale companies.
The importance offered to each of the above-mentioned three qualitative factors is different for different companies.
Some companies consider urgency to be the most relevant factor, as it offers a push to projects at an opportune moment. Urgency also lets the projects flourish under the given timeline when the project is most active. It also builds the base of a project for the managers and business owners to work on an urgent basis so that the projects don’t have to delay due to man-made errors and lateness.
Some other companies in India provide more weightage to strategy as the most important qualitative factor for project implementation and success. Strategy as a whole lets businesses stay prepared for all events. It offers flexibility and opportunity to investors to stay invested and change tracks when there is an utmost need for investment in other projects. Such flexibility makes the businesses lean and able to function under a tight schedule.
Intuition, Security, and Social Factors
Apart from the three factors that are followed by most organizations in India, there are some companies that stress on intuition, security, and social factors. These companies believe that organizations are run by human beings and hence all human factors must be considered in case of most useful qualitative factors.
As mentioned, the choice of qualitative factors changes with changing demography. For example, the companies in the USA consider customer satisfaction and morale, investor engagement and image, etc., as important factors. There is a consideration of the legal angle of business too that is considered by the companies in the USA.
Conclusion
It is, therefore, notable that qualitative factors play an influential role in capital budgeting decisions. They may not be as clear as quantitative factors, but they are equally important. It is especially the long-term vision and commitment of the companies that make companies rely on qualitative factors. However, qualitative factors must not be the only factors affecting capital budgeting decisions, but should be used handinhand with quantitative measures.
Updated on 24-Dec-2021 11:15:35
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As a small-business owner, you probably have a good head for numbers. This skill puts you in a good position to assess a capital investment decision from a purely financial, or quantitative, perspective. But as you're probably learning, it's the qualitative factors in investment decisions that can turn any sensible balance sheet on its head.
Get Your Bearings
Your good instincts may be prompting you to research the moves of businesses that confronted similar capital investments; they could provide some cautionary tales for you to follow. But here, too, the numbers may be easier to unearth than the qualitative factors, or the less concrete and somewhat subjective measures.
Companies tend to guard these factors closely, which is why the following list of factors affecting capital expenditure decisions may assist your due diligence efforts. Every one may not be precisely relevant to the capital investment you're considering, but they all should eliminate the element of surprise from your decision making process.
A Fixed Asset May Be Top-of-Mind
This is probably a heady but somewhat nerve-racking time in the history of your small business. Capital investment decisions usually are since they often involve the acquisition of fixed assets such as a building, distribution center, factory or warehouse.
Abbreviated in financial circles as CAPEX, capital investments often allow businesses to address one of three needs:
- A need to expand.
- A need to replace.
- A need to rebuild.
Any one of these needs should ultimately lead to greater profits for your business, whether you're purchasing an existing asset or building one of your own. But for now, it's probably coming as no small irony to you that the non-monetary factors in decision making are consuming so many of your waking thoughts.
Tech Investments Drive Capital Decisions, Too
You may find yourself in a similar state, if you're considering a major investment in technology. In fact, technology investments represented most of the capital investments small companies made in the first quarter of 2018.
As much as your small business may have come to depend on social networks, real growth – sustained and robust – may depend on investments in new software and hardware. Like many other small-business owners, you may find that investing in cloud computing, data and information security and other tech tools:
- Can streamline your business, leading to greater efficiencies. Improve the quantity and quality of the interactions with your customers. Is less costly than you may think. In fact, compared to other business expenses, a Forbes study found that while paying a skilled professional costs about $60 an hour and renting office space costs about $2 an hour, some technology upgrades can cost as little as 20 cents per hour.
Consider Factors in Fixed Asset Investments
If you're debating the wisdom of acquiring a fixed asset, your qualitative investment appraisal may focus on one of three factors:
- Corporate culture, or the underpinning values and beliefs that define an organization or group of people. Like other qualitative factors, you cannot measure culture in monetary terms, but you sure can get a feel for it by finding out how people approach their work, how they interact and solve problems and what motivates them to improve. If this sounds like a code for “morale,” you're half right. Productivity often supplies the other half since productive employees are almost always satisfied employees. More than any other contributor, values form the cornerstone of a corporate culture, and it's worth considering other things that spring from this foundation, such as employee camaraderie (or the lack of it), teamwork (or the lack of it) and cohesiveness. A culture clash is one of the primary reasons that many capital investments (and mergers) fail.
- Commitment to quality, which you could make a compelling case for saying is yet another reliable indicator of a corporate culture. It's also one of the most important qualitative factors in investment decisions since it could breed either compatibility or set you on a collision course if your goal is to make a product of the highest quality while your potential investment choice emphasizes cost-cutting. It's what Investopedia calls “integration risk,” or when integrating two operations looks a lot better on paper than it turns out to be in practice. You can avoid this risky business by making the changes your due diligence uncovers.
- Neighborhood reception, which is another way of saying, “How will your new building be greeted by local residents?” or “How will any changes I make to this existing building be greeted by local residents?” Even global tech companies that have come barreling into towns with promises of employing thousands of people have been stopped in their tracks by fierce objections from residents. They often conduct their own qualitative investment appraisal, sometimes deciding that factors such as more noise, lights, traffic and pollution aren't worth the financial rewards. Residents can be won over, but even companies with deeper pockets than many small business have discovered: the concessions don't come cheaply.
Consider Factors in Tech Investments
It's relatively simple to assess the quantitative stakes of a technology investment. But you can reduce practically all of the qualitative factors in such investment decisions to one question: Can you afford to stand still? Answering this question requires vision, and as the business owner, you are uniquely qualified to provide it. You can fill in the gaps by:
- Researching the competition, realizing that you're probably not going to be privy to “the vision thing” that other small-business owners hold dear. Still, monitoring the operations, tactics and maneuvers of your rivals ought to be business as usual. And referring to the SWOT analysis in your marketing plan should help you flesh out the details. Intensifying your efforts prior to making a capital investment in technology could help you outwit, outfox and outpace your competitors – once and for all.
- Consulting your stakeholders, especially your employees and customers. If you approach them in a sincere and thoughtful manner, they should be more than happy to tell you what they need, and want, to improve your product or service offering. Like many small-business owners, you may not be able to make every tech investment at once. But gaining stakeholder insights can help you prioritize and communicate your progress to them, in good faith, while the investments materialize. (It's good PR, too.) Since your customers probably hold the future of your business in their hands, they could be the most influential of all the non- monetary factors in your decision making.
- Looking beyond the actual implementation. Whether your goal is to reduce the time your staff spends on repetitive tasks, secure your business data or provide a better customer experience, investing in technology is rarely one of those “one-hit wonders” – a quick fix that you can institute and then put in the rear-view mirror. It will probably require more maintenance, which means a regular financial investment in staff time or outsourcing. Since you have a good head for numbers, this realization shouldn't be unsettling. Try to remember that, as always, it's the human dimension that will tilt the scale of success in your favor. Research shows that businesses grow best when technology and human beings work together to meet customers' needs – and that's a qualitative factor worth banking on.