As part of any annual budget process there should also be the preparation of a capital budget.  The capital budget is a separate budget that is not included as part of the day to day operational budget as it relates to the purchase of assets.

Capital budgets have more of a focus on longer term investments so as part of the preparation you need to review the strategic objectives and make sure these investments are aligned to the objectives.  Therefore, try and assess the long term benefits that the investment will derive for the organisation.  More advanced methods such as net present value, return on investments and payback calculations can be used to assist you to do this.

As highlighted in the previous posts, the need to have accurate records for your assets and ensure they are properly maintained and managed helps to get the most out of the asset.  This can then make it easier to determine when the existing assets need to be replaced or when new assets need to be purchased.

Some steps to follow to prepare your capital budget include:

  • Be clear about the reasons for purchasing the asset.  For example, is it simply to replace an old asset, needs to be purchased as the previous asset was damaged, lost or stolen, there is a need to purchase new equipment or the organisation is expanding.
  • From the list of assets try and prioritise them in regards to the importance in acquiring the asset.
  • Identify when the asset should be purchased during the year.
  • Determine the costs for the asset and make sure any other costs such as for installation, ongoing maintenance, delivery and insurance are included.
  • Determine how you plan to purchase or acquire the asset.  For example, will it be an outright purchase from existing funds, a bank loan, targeted donations, lease arrangement or from a grant.
  • Assess the impact on the cash flow for each method of purchase.  For example, will there be a once only impact for an outright purchase as against monthly payments with a loan or lease. 

Once you have prepared this information you should be clear about when you plan to make the purchase, how it will be funded and other related costs.  This will then make it easier to prepare the capital budget.