Question

What does it mean to integrate the capital budget into the operating budget?

Answer 1

The goal of a business is to manage its activities of buying, selling and paying expenses to make a profit. Budgets are the roadmaps of how you intend to start the year and how you arrive with a profit at the end.

Operational Budgets

An operational budget is a detailed projection of the company's revenues and expenses for the upcoming fiscal year. These budgets record the expected cash flows from the firm's buying and selling activities and their effects on the income statement. Operational budgets generally cover one fiscal year.

Capital Budgets

A Capital budget shows the detail projection of the company’s plan for procurement of funds and estimated investments from the procured funds. Suppose that some of your equipment is getting old, and maintenance costs are becoming more frequent. The solution is to spend $100,000 on a new machine, but where will that money come from? Do you borrow from the bank or finance it with internal cash flow? Constructing a capital budget will provide the answer to this question. Capital budgets affect changes on the long-term assets portion of the balance sheet.

Similarities of Budgets

Both types of budgets compel the company to figure out how it intends to pay the bills and how it will find the money to purchase additional assets, as the business grows. The process of setting up a budget is helpful for not only making a profit and but also to have enough money for the expansion of the company.

Interactions between Budgets

Purchases of fixed assets as projected in the capital budget will have an impact on the operational budget. New equipment may increase the efficiency thereby reducing maintenance costs and increasing revenues. These changes must be coordinated with the capital budget and thus reflected on the operations budget. If the company wants to purchase fixed assets, some of the cash needed may have to come from the firm's normal operations and cash flow. If so, an operational budget has to incorporate this requirement for cash in addition to paying normal expenses.

In Conclusion we can say that change in capital budget has to be incorporated in the operating budget so that the impact of capital changes can be seen in the operating activities of the company. This will also help the management to take better and concise decision