Briefly explain what is meant by perfection standards. How might they affect a company's budgeting process?
Perfection standards refer to satisfying all the conditions required for making a perfect collateral, following the terms and conditions specified under it.
Budgeting process helps a company to take decidions as to where to invest and how much to invest. A company would have been given different options to select among them on which they would invest and how much. For this a budgeting process is done that requires analysing all alternatives and take the best decision that would give more profit to the company.
Now this decision making process is highly affected by perfection standards. Let us see how.
When projects are being analysed, the one project that has potential to earn more profit to the company, is not eligible in fulfilling all the terms and conditions of the company laid for selecting projects.
In this case, that project will be rejected and company has to choose any other project and invest at other place. This way it faces opportunity loss which can be at times a huge loss for the company.
Let's take an example, there is a company, IGL which provides supply of Gas for CNG and PNG. There is a new project to be started under PNG which has potential to create huge profit approx 50 crore, and the initial investment required in it is 5 crore. But there is a problem that under PNG, company does not allow projects costing more than 1 crore. Therefore due to this the project could not be selected for investment.
Though it could have brought huge profit in the organization.
This way we can see that how perfection standards affect the company's budgeting process.
It is seen in many cases that this is a very challenging task to do anything with full perfection, meeting all targets following all the terms and conditions. Same implies to the business. This definitely these perfection standards would affect the budgeting process.
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