Capital Expenditures Budget

The Capital Expenditures Budget is not a part of the annual budget development process, but it is very important to the development of the annual budget.

The Capital Expenditures Budget is the budget for long–term capital expenditures such as property, plant, and equipment. Because capital expenditures are large and expensive, they require advance planning to have the financing in place and the necessary time to purchase or construct the assets so they will be available when they are needed. Therefore, the capital expenditures budget is usually prepared for years in advance and reviewed on an annual basis.

Any capital expenditures to be made during the budget year will need to be included in the budgeting process for the year. Capital expenditures budgeted for the coming year will affect the Budgeted Balance Sheet as increases in fixed assets and in accounts receivable, inventory, and accounts payable. They will affect the Budgeted Income Statement as income expected from the new projects along with related expenses, including depreciation on the new equipment. Those effects on the income statement and the balance sheet will affect cash as well, so they will flow to the Cash Budget and the Budgeted Statement of Cash Flows.

The Capital Expenditures Budget consists of a list of each major project that has been approved and the amount to be funded for the coming year. The annual amount for each project is then broken down according to the quarter(s) or possibly month(s) when the expenditures for each project are expected to occur and when the cash inflows from each project are expected to occur. The quarterly or monthly totals of cash inflows and cash funding requirements for all projects that will affect the coming budget period will be used in preparing the Cash Budget as well as the Budgeted Balance Sheet. Any anticipated financing must also be included in the Cash Budget and the Budgeted Balance Sheet. The Budgeted Balance Sheet must reflect the investments and the financing, and the Budgeted Income Statement and Statement of Cash Flows must reflect any net income and cash flows planned to be generated by the capital projects for the coming period.

Senior management must communicate information about planned capital projects for the year to the department heads who will be developing the Operating Budgets so they can incorporate the effects of the planned capital projects into their budgets for the year.