Health and Human science 455

CH17HSCI455.ppt

Chapter 17:

Capital Expenditure Budgets

Because capital expenditures generally acquire long lasting assets, capital expenditure budgets usually involve long-term financial issues.
Capital expenditure budgets are also sometimes known as “capital spending plans.”

Versus Operating Budgets

Usually deal with short-term revenues and expenses that are necessary to operate the facility.

Creating the Budget

Capital expenditure budgets are often created in two parts:

Budget Construction and the
Cash Flow Analysis Concept

A cash flow analysis illustrates how the project’s cash is expected to move over a period of time.
When constructing a capital expenditure budget, the cash flow analysis should be cumulative.

Cash Flow Reporting Methods

Cash flow reporting for this purpose typically uses one of four methods:

(All four methods are described, including an example for each, in the Appendix to the chapter.)

Budget Inputs

Capital Expenditure Budget Construction with Operating Budget Inputs
If the operating budget proposal would require additional capital equipment and/or space renovations, then capital expenditure budget inputs may have to be included to recognize the impact of these operations proposals.

Figure 17-1 Capital Expenditures Budget Inputs.

Budget Construction and
Startup Cost Concept

On the other hand, if the capital expenditures budget proposal includes operational expenses, management often requires that startup costs also be considered.

Funding Request Process

The process of funding capital expenditure requests (also known as proposals) varies case-by-case depending upon the particular organization.

Capital Expenditure Proposals

Rationing Available Capital

Only a limited amount of capital is usually available for capital expenditures, so rationing is necessary.
Three factors will probably be considered:
Necessity for the request
Cost of capital to the organization
Return that could be realized on alternative investments

Evaluating Capital Expenditure Proposals

Because rationing is necessary, evaluating the proposals is a method of allocating the available capital.
Evaluating capital expenditure proposals may be either subjective or objective.
Objective evaluation is the most desirable.

(See more details in the chapter.)

Evaluating Capital Expenditure Proposals

An objective evaluation may involve two steps: