The Difference between Capital Budgeting and Planning
Can you say with 100% certainty that your capital budgeting process is well developed and practical? And, that investment decisions aren’t overlooked, rushed, and even pushed aside?
Capital planning and budgeting is critical to the health of an organization, however, anticipating costs for projects isn’t an easy task. The reason? Everyone cross-departmentally is responsible for the contribution to the process of investment to ensure it runs as smoothly, and as effectively as possible. But, too many hands in the pot often results in inefficiency.
Let’s gather a basic understanding of how to keep your organization on track when it comes to capital expenses. First, some definitions:
- Capital budgeting. Figuring out how to spend money in a certain time period – next year, the year after, and so forth.
- Capital planning. Going about spending money to impact the organization as a whole.
Capital Budgeting
A complete capital budget looks to address the needs of an entire property within the limits of finances. For example, when we evaluate the physical condition of a building, determine upkeep costs, and identify existing and anticipated needs, we are able to develop a capital plan.
Making an investment means collecting data for condition assessment. But, this has to be done with a clear understanding of objectives: what is the purpose of gathering this data? Gathering data contributes to having a plan, and, when we know what kind of data needs to be collected, and what to do with it, we are able to make more sound decisions.
Automated technology is useful in this process. With the right analysis tools it becomes possible to look at the effects of decision-making. Automated solutions help to develop scenarios and play out those scenarios to see how today’s decision will impact tomorrow.
Capital Planning
According to Oxford University Press, capital planning is an integral part of an agency’s strategic planning process that provides a blueprint in order to meet the goals and objectives in the agency’s strategic and annual performance plans.
Capital planning is a conversation that revolves around making commitments to long-term projects, and whether or not these projects will benefit the business for many years.
The capital planning process determines whether or not an organization’s long-term investment is worth funding through the company’s capitalization structure: debt and equity capital that is used to fund a business’ operations, capital expenditures, acquisitions, and other investments.
The right technology has the capabilities to plan the true value of an expense, and use that data to maintain profitability throughout the organization.
How to Prioritize Capital Projects
Prioritization of investments is critical. You should be addressing capital projects in the order of need or perceived value.
In order to achieve this, you have to create consistent criteria for evaluating each one. Oftentimes, the squeaky wheel gets pushed up to the top and gets the fix. But, if you set the right criteria for evaluating each investment option, you get rid of bias, and make sure to satisfy those investments that are most lucrative.
Using the Facility Condition Index (FCI) is a good way to understand which projects need the most attention. If you have a building with a FCI of .20 compared to one with FCI of .80, you have a clear picture of where the money should go.
Other factors to take into consideration: If there is a building that requires capital investment, yet you are planning to sell it in the near future, it shouldn’t rise to the top of your list of investments.
Defining Yearly Capital Programs
Leading organizations understand that capital planning is a year-round process. Yet, most companies don’t have this luxury as a result of constrained resources. However, budgeting should be an ongoing process, even if investment happens only once a year.
Planning even enables capital budgets to become available when all details are transparent and organized to ensure all stakeholders are on the same page. For example, if a simple lighting-system is purchased or an office renovation takes place, making sure that contractors and vendors are given time to respond to bid requests will ensure that the operation will run smoothly. Worst case scenario, the amount of the estimate will increase if the organization isn’t on top of the plan.
The right technology helps to determine the needs and relative costs of the entire lifecycle of the investment, while providing oversight of large projects. Everything from design to construction is accounted for, making sure that nothing slips through the cracks.
This is why paying attention to detail is so critical. What will it cost to remove an existing roof before installing a new one? Will it be a challenge to remove an existing boiler before replacing it? These answers should be in your budget. You need to be rigorous when it comes to quality of materials, maintenance costs, and how the systems will be used.
In Conclusion…
Organizations often run their operations under pressure due to the involvement of all departments, and the inefficiencies that come as a prize. But, when planning for the future of your organization, you need to ensure that your plans are funded, and budgeting is the most effective way to do so, enabling you to invest in gainful opportunities at the most opportune time.
A budget will help you control your finances, and ensure that commitments are continuously funded. This way, you will have comfort in making the best decisions to meet your short, and long-term plans.
