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Risk Analysis, Practice, and Considerations in Capital Budgeting: Evidence from the Field for the Bio-based Industry
The practice of risk analysis and capital budgeting has been commonly used within various businesses and specifically, the bio-based industries. Previous studies have found capital budgeting practices being conducted in organizations across all regions of the world. It’s important to note that over time, due to the technology available, many businesses have handled risk differently since they now have access to capital budgeting software systems (Abbati et al., 2021). As risk assessment and capital budgeting go hand in hand (a capital budget outlines the risk assessment), various hypothesis that could explain the type of risk analysis in multiple areas of the bio industry needed to be investigated.
Multiple survey questionnaires were utilized to collect data from many bio-based industries and found that only ¼ of bio-organizations even had a thorough understanding and background knowledge on capital budgeting and risk analysis (Abbati et al., 2021). It is important to note that businesses within retail or the food industry utilize risk and capital budgeting assessments with massive financial success due to their financial management capabilities. Another conclusion found from the study is that of those who did use capital budgeting, more than 95% favored qualitative and quantitative methods (as opposed to probabilistic methods) (Abbati et al., 2021. The study also found that the favored financial metrics utilized within the bio-industry for capital budgeting purposes is Return on Investment, Internal Rate of Return, and Net Present Value. It is also important to identify that more than 80% of survey entries claimed to only use capital budgeting after risk assessment happens in the later project stages (which somewhat defeats the purpose of capital budgeting) (Abbati et al., 2021).
A lot of knowledge was gained within this article which brought many different thoughts going into my mind about capital budgeting. First, it is vital for bio-organizations to use capital budgeting due to the complex field of research, science, tests, and uncertainty the field holds. Capital budgeting would allow for scientific research and examination to be done without fear of losing money because they should have set a capital budget. To hear that the majority of bio-based industry’s do not use capital budgets could explain why certain pharmaceutical companies must stop testing on new products…because they haven’t set financial parameters based on a capital budget, they should have set. Just last week, within the last discussion post I wrote, I mentioned a certain pharmaceutical drug that had to stop all testing despite the fact that there was none other like it on the market in order to help with Osteoporosis. It’s definitely sad how if bio-medical companies did set capital budgets, the public would most likely have access to many drugs that are still being tested right now (due to insufficient funds because of the lack of capital budgeting).
Abbati de Assis, C., Suarez, A., Prestemon, J. P., Stonebraker, J., Carrillo, C., Dasmohapatra, S., Jameel, H., & Gonzalez, R. (2021). Risk Analysis, Practice, and Considerations in Capital Budgeting: Evidence from the Field for the Bio-based Industry. BioResources, 16(1), 19–45. https://doi-org.lopes.idm.oclc.org/10.15376/biores.16.1.19-45