Money Management With Capital and General Operating Budgets

What are a few of the main differences between a capital budget and the general operating budget and how do the budgeting processes differ with each of these

A capital budget focuses on big-ticket items with loans and long-term pay-offs such as building purchases or major renovations, vehicle purchases, or major equipment such as copiers, or equipment necessary to run a specific business.  It generally involves depreciation of the item over time.  It also involves calculating and compounding interest.

For example, let’s say Company X has purchased a piece of land adjacent to its primary warehouse for $460,000 and plans to build an addition that will cost about 0,000.

  The total price of $1,000,000 will be spread out over ten years, costing $100,000 a year in principal payments.  In addition, taxes and interest will cost an additional amount, say 35% (and that’s just a guess), or $35,000, totaling $135,000.  These funds will be taken out of capital reserves on hand and future capital funds taken from excess revenues.

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The general operating budget, on the other hand, is simply the estimated amount of money anticipated to be earned (revenue) and spent during the fiscal year.  Let’s say, for example, Company X manufactures paint.  It has a factory with employees (hourly production workers and management), raw materials, mixing and canning or packaging equipment, sales and marketing staff, distribution employees and vehicles, safety and quality improvement staff, support staff such as accountants, human resources, clerical support, maintenance and food service staff, risk management staff, fringe benefits, etc.  All of these items are expenses.

If the business is successful, its sales revenue will exceed its expenses by a reasonable amount, let’s say 18%.  Out of that amount is deducted a portion to be set aside in the capital budget, and a portion for reserves.  Perhaps half of the excess revenue will be set aside in these accounts.  The remainder is profit, either to be sent to stockholders in the form of dividends if it is a corporation, or to be split among the owners if it is a limited partnership or family-owned business.  If an individual owns the entire business, then he or she gets the profits.

It should be mentioned that the operating budget should be closely monitored and adjusted to ensure expenses don’t exceed revenues for extended periods of time, because the goal of any business is to operate within its budget, expand its business and production capacity through capital improvements and generate a reasonable profit.