Tips for understanding capital budgets
Capital planning is a way of defining how you're going to spend money to get the most impact for your company and its mission. Capital budgeting is knowing what you're going to spend your money on in the next year (or two or three). Therefore, capital planning and capital budgeting go hand in hand. Abiding by these principles when developing a capital plan can help ensure that your capital budget is more thorough, accurate and meaningful:
1. Define the needs of your company, preferable over a period of three to five years. Identifying company needs is best done via a comprehensive evaluation of all facilities and their systems. Some company's choose to hire this task to an independent firm, while others choose to take on the assessment themselves. An assessment of current conditions should be very property-specific of what inventory exists. Condition assessments can create the foundation for an effective preventive maintenance program. This will help make decisions regarding short and long term needs, and differentiate between actions that should be handled by the operating budget vs. those that require new capital. As data is gathered during a condition assessment, it is sometimes collected without a clear understanding of its objectives. Keep your goals and intentions in mind, if you know how you are going to use the information, it may influence how you collect it. Databases can be useful in this process. They can look at the effects of the decisions you make. Based on the decisions you make today, they can create scenarios and play out those scenarios to see, what the future is going to look like.
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2. Distinguish between costs for operational and capital expenses; estimate the costs and timing of the work. Concentrate on ten or fifteen company systems and think about the costs and remaining useful systems associated with them. If you are only focusing on the big system items, you are missing an opportunity to operate the system more efficiently. Pay attention to the relationship between the "big" things and the "little" things to really see the big picture and how to improve the overall system. Understand and apply the concepts of not only acquisition costs, but the necessary expense of design, installation, maintenance (both preventive and anticipated), training, and any recovery opportunities at the end of the life of the equipment or product.
3. Prioritize capital projects, many experts suggest that capital equipment purchases and projects should be prioritized in this order:
-Start with projects that pose health, safety, or code related issues.
-Next, move on to items that will have adverse consequences if they are deferred.
-Then, the tasks that will help you reduce future capital and operating costs.
-And finally, think about the marketability of your properties and the projects that will add perceived value to the organization.
When making decisions about which capital projects and equipment purchases to tackle remember that there are standard useful life assumptions for virtually everything in commercial real estate.
4. Distinguish the annual capital program for the next fiscal year with guidance from senior management. Think about the budget as an ongoing course of action-even if it is something that really only happens once per year. A continuing, long range capital planning program that is validated and re-estimated every year will help in addressing and evaluating future needs.
5. Solicit bids from qualified contractors for new equipment, projects, etc. Attempting to save costs up front may result in higher overall expenses for a capital improvement project. Enlist a professional, qualified assistant to help you determine the actual need and relative costs of design, construction, and the oversight of large projects. Throughout this process, pay attention to the details and insist on quality materials, and know how the systems are used and maintained.
