How To Prepare a Capital Budget

Report of finances

Preparing a budget is vital to any company or business for a number of reasons. A capital budget is needed to increase revenue whilst decreasing costs and expenses. Many corporations normally plan an annual budget that will assist management in evaluating the total performance of the organization. Capital budgets, on the other hand, focus more on the long term investments. At the same time, management can examine and analyze the costs of purchasing or upgrading equipment and other fixed assets.

  1. Evaluate the needs of the company. Before drafting a budget, management will need to examine the existing financial objectives and capital development goals and determine what level the company is at. This analysis will lead to management determining the needs of the company that will require additional capital investments to hasten the timeline in achieving the goals.
  2. Gather the pertinent data. The next step in the process of creating a capital budget is to gather all the data. Go to your finance department and get the latest cash flow statements to analyze the existing costs vs. revenue. Once you have this, you will want to get the financial projections for the future years where your capital investment will be amortized with to reach the appropriate return of investment. Finally, you will need the cost estimates for all the capital expenditures you plan to put in the budget. For example, if you are planning on investing in a new building, then you will need to speak with various construction companies and architectural firms to get the estimates of the project. You will need the estimates for all the assets you will invest in to complete the capital budget.
  3. Compare the capital budget with the cash flow. Whenever a company makes capital expenditures, they will expect a certain return on the investment for a particular timeframe. These will be based on the potential revenue streams and current cash flow the company is enjoying. It is understood that an investment will only be made if it will increase the financial bottom line and increase the total financial performance of the company. Since you have the estimates for the capital needed and the financial situation of the company, compare it and figure out when and how the capital investment will be recovered. If the recovery is acceptable, then the capital budget may be approved by the heads of the company.
  4. Create the budget. Now that you have all the data needed, it is time to plot it and create the actual budget. Use a spreadsheet application like Microsoft Excel. Plot down the existing cash flow, the assets needed to be purchased or upgraded, the total capital investment needed, and the projected cash flow once the new assets are in place. If you are investing in equipment, make sure to incorporate its depreciation when plotting the return of investment. If the asset is something that can increase in value over time, then you can plot this down as well. This will help the investment recovery process.
  5. Check your figures. Before presenting the capital budget to upper management, let accountants and financial analysts look over the numbers. It is all about numbers so you need to be sure that your numbers will stand against scrutiny.

Once your capital budget is approved, half the work is done. Next up will be sourcing and securing the funds. Overseeing the whole project will come after this. Be prepared for more work as the days go by. However, if you prepared a capital budget properly, then you are almost at the finish line.


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