HLB Reliance (Zambia) realise the primary goal of financial management is to maximise or to continually increase shareholder value. Maximising shareholder value requires managers to be able to balance capital funding between investments in projects that increase the firm’s long term profitability and sustainability, along with paying excess cash in the form of dividends to shareholders. Managers must do an analysis to determine the appropriate allocation of the firm’s capital resources and cash surplus, between projects and pay-outs of dividends to shareholders, as well as paying back creditor related debt.
This ‘capital budgeting’ is the planning of value-adding, long-term corporate financial projects relating to investments funded through and affecting the firm’s capital structure. Management must allocate the firm’s limited resources between competing opportunities (projects).
Capital budgeting is also concerned with the setting of criteria about which projects should receive investment funding to increase the value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on the basis of value-added to the future of the corporation. Projects that increase a firm’s value may include a wide variety of different types of investments, including but not limited to, expansion policies, or Mergers and Acquisitions. When no growth or expansion is possible by a corporation and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company’s stock through a share buyback program.