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Capital expenditure budgeting involves creating separate budgets for long-term and current asset purchases to analyze tax implications and report on items impacting the current financial situation. The fiscal year budget only includes assets and liabilities affecting the current year, with long-term assets accounted for in separate budgets, such as the capital budget. The capital expenditure budgeting process involves developing a master budget for approval by management or the board, with two approval phases for large investments in long-term assets.
Capital expenditure budgeting is the process of establishing a financial plan for long-term business asset purchases. Companies create separate budgets for the acquisition of current assets and long-term assets. Current asset purchases only affect a single operating year, while long-term asset purchases affect multiple years. Keeping the two types separate makes it easier for companies to analyze the tax implications and report only on those items that have an impact on the current financial situation.
Budgeting is an important part of business management. A budget is a plan for the future that details expected income and expenses. Operationally, the budgets are linked to the most important economic cycle: the fiscal year. Each fiscal year, a company must report its operations to pay taxes and make required disclosures to regulators and investors. Although a business can create a budget to reflect any time period, it is the fiscal year budget that is the basic tool for operations.
A budget for the fiscal year refers only to the assets and liabilities that affect the current year. The inclusion of items that affect more than one year makes it difficult to assess the financial success or failure of current operations. To maintain the relevance of the fiscal year budget, long-term assets and liabilities are accounted for in separate special budgets. One of the most important specialized budgets is the capital budget.
Capital expenditures are purchases or investments in long-term assets, such as facilities, equipment, and research and development. Funding for these items occurs over more than a year. Capital expenditure budgeting is the process of maintaining a separate budget for these assets, and often a separate approval process.
The capital expenditure budgeting process typically includes the development of a master budget for approval by management or the board. This budget can cover ten or more years, depending on the assets involved; reflects the long-term assets the company owns, is in the process of financing, and expects to purchase in the future. Capital expenditure budgeting often involves large amounts of money and decisions that will have a significant effect on future operations.
The time period involved and the size of the investment in long-term assets often means that the capital expenditure budget has two approval phases. A master budget is approved at some point as an overall game plan. As the time for actual funds to be allocated to make a budgeted purchase approaches, the individual allocation of funds often must be approved again. Sometimes this can result in the cancellation of an expected capital expense. Governments often find themselves in the position of having approved a capital expenditure in the past year and reversing the decision in a later year, when the actual allocation is rejected by a different administration.
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