Budgeting

Budgeting and forecasting is all about projecting the future resource requirements of a business and yet is often the least refined of all the normal business processes. It tends to occur as a discrete annual event rather than as a continuous process of planning and review, as its name suggests. In real terms, it encompasses all of the following activities;

Sound inputs sourced from skilled and experienced engineers and operational personnel are usually collated by finance department into single spreadsheet project plans effectively dissociating them from their respective technical and economic justifications. This, of course, makes any subsequent changes virtually impossible to track.

Progressive performance analysis against budgeted time scales and expenditure are all but impossible to generate in a timely manner and this further stymies any useful feedback. On top of this it usually requires a disproportionate amount of management time and effort to construct and maintain the budget, making the whole exercise seriously questionable in the eyes of many concerned.

To be of any real value as business intelligence, CapEx budgeting needs to be a dynamic system of planning, processing and review from the inception of the original plan to the capitalisation of the final project assets. It needs to be capable of recording each stage of the procurement process, each change and transaction, whether the acquisition is a piece of office furniture or an entire Nuclear Power Plant. The procurement process for any asset is essentially the same; it is only the degree of detail and the number of inputs that really differ.

On this basis a simple model reflecting two fundamental investment types usually suffices; one, recurring items of expenditure required to maintain current business operational capabilities and two; special projects, usually longer term constructed assets involving high investment, detailed planning and usually subject to considerably more sophisticated technical and economic criteria.

In order to fulfil the forecasting objective it is necessary to know to what class or type an asset belongs where it will be used. Basic inputs to any budget plan must therefore be classified against a standard business model to ensure that projected expenditure is allocated correctly and in sufficient detail to extract meaningful information for accurate strategic planning.

This is the ultimate CapEx forecasting tool. The 'Planned Obsolescence Report' in the Fixed Assets Register is specifically designed to produce a comprehensive list of assets that expire their effective life in a given future period and it presents these in the precise format required for import to the CapEx Budget Plan. Reports can be produced at any time and for any situation and any future year.

This is a serious time saving device and one which removes the guesswork from future budget forecasts. It also has the effect of promoting greater local custodianship of assets as there is now a genuine reason for key personnel to ensure that both the effective life and condition criteria for any asset in their area of responsibility is correctly monitored and recorded.

This capability resolves the task of identifying the timing and cost of these 'recurring items of expenditure' referred to above and it does so in a matter of seconds, or minutes for any size of organisation.

Most items of capital expenditure are relatively minor in nature and form part of annually recurring projects. Office equipment, motor vehicles, IT hardware and software and so on being some of the most common. Special projects, particularly those requiring major investment and spanning several years in execution with multiple development stages and large numbers of individual suppliers and transactions would have their own individual project designation and warrant considerably more detailed inputs.

The CapEx Budget reporting scavenges purchasing and expenditure transactions from the Work in Progress module to formulate detailed analyses of budget progress and performance for all projects. The Budget Allocation report particularly is an extensive reporting tool specifically designed to aid the project manager in monitoring progress at both the macro and micro levels, tracking detailed costs and the relevant summaries for reporting to the board of directors.

The Budget Review function provides an on-line medium for management review of budget performance and presents live data in a series of critical perspectives;

Having examined current performance against budget, any change in investment priorities can be approved and applied dynamically during the review session. Future cash flow requirements arising from these changes will then be re-set and also applied globally as a part of the review process. This is a major departure from the normal manual review/approve/change process.

Once budget plans are approved by management all allocations, or variations to original allocations, form part of an audit history. This makes it possible to trace from an asset record through the CapEx documentation to individual supplier invoices and purchase orders, back to the allocation of budget funds to discover the full procurement transaction history for the asset. This is a permanent record and is available to the Budget reports for any historical year and period.

With this level of historical information there is an opportunity to optimise the budget process over time and to remove any inherent inefficiencies. For example, if the comparison of planned cash requirements against the actual spend patterns consistently highlights a serious time difference then improved timing can seriously reduce the cost of funding. By simply reviewing the actual order/delivery lead-times and available creditor terms a more accurate funding schedule can be easily achieved.

The impact of capital expenditure projects on future profit performance is always more extensive than just forecasting future funding requirements, or periodic depreciation charges. However, your ability to project these costs of ownership is an essential component of any strategic forecast and Activa provides the tools to evolve this very quickly and very accurately.

The Budget Forecasting report predicts future depreciation charges of approved, unallocated budget funds, based on classifications applied to individual budget items using the standard templates from the Fixed Assets Register. When used in conjunction with similar facilities in CapEx Work in Progress and Fixed Assets Register reports, a complete assessment of depreciation charges is available for any future period.

These notes are intended as a product brief and should not be read as the full specification of Activa software. If you have more specific questions please use the Search option on this site. If you do not find what you are looking for on other pages of this site please complete a Contact Request noting your area of interest and we will respond by return.

The following pages contain information directly related to the capital expenditure budgeting module;

Bookmark Page | Download PDF
Article last updated : Feb 23 2012 10:30AM