Capital budgeting systems define the way a company allocates decision rights and responsibilities for capital expenditure analysis. This article argues that capital budgeting systems are central to effective resource allocation and discusses two recurring challenges in system design and management: maintaining top management leadership and properly defining top management's administrative role. We maintain that leadership is best achieved by tightly linking strategic planning and capital budgeting and argue that the top management's chief administrative responsibility is to create a healthy decision-making environment for operating managers.

It is one thing to know how to evaluate investment opportunities and quite another to do so, within the context of a large organization. Capital investment analysis is widely understood as involving three discrete steps: estimation of the opportunity's periodic costs and benefits, calculation of a figure of merit, such as the net present value or internal rate of return and comparison of the figure of merit with an acceptance criterion, such as a risk-adjusted cost of capital. If one person, or a small like-minded group, performed these tasks, the investment appraisal would be comparatively straightforward. It is better to pass all investment ideas, however tentative, to the decision-makers and await their conclusions.

Such a process might be feasible in small, entrepreneurial organizations, where all executives are fully conversant with every aspect of the business, but the same might be completely unworkable in large organizations. In large companies, senior executives seldom have all the requisite information and thus, investment appraisal becomes a team activity, involving a changing cast of characters based on who possess the most knowledge about the opportunity at hand, often supplemented by senior management guidance and finance department expertise.

A company's capital budgeting system defines the processes and procedures by which, executives throughout the organization coalesce to identify and evaluate individual capital expenditure initiatives. Capital budgeting systems may sound like an organizational behavior issue, quite removed from the analytical world of project appraisal. To the contrary, we will argue that the proper design and management of a company's capital budgeting system are central to innovative, value-creating resource allocation decisions. In many firms, the capital budgeting system is the missing link in effective project appraisal.

Projects & Profits Magazine, Capital Budgeting Systems, Effective Resource Allocations, Strategic Planning, Capital Investment Analysis, Decision-Makers, Entrepreneurial Organizations, Organizational Behavior, Digital Manufacturing, Operational Planning, Preliminary Development Approval Request, PDAR, Capital Budget Review Committee, CBRC, Financial Metrics.