capital planning and budgeting

8/12/2019 Capital Planning and Budgeting

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OUTLINEOUTLINE

Capital planning and budgetingCapital planning and budgeting

Requirement of capital projectRequirement of capital project

Capital planning procedureCapital planning procedure

Operation and capital budgetOperation and capital budget Fixed and flexible budgetFixed and flexible budget

Revision of budgetRevision of budget Budget control method (audit)Budget control method (audit)

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CAPITAL PLANNINGCAPITAL PLANNING

List anddescribecapital project

Effects of

plan on keyfinancialvariables

Project

fundingprocedure

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BUDGETINGBUDGETING

EVALUATION COMPARISON SELECTIONCAPITAL

BUDGETING

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INTERACTION BETWEEN PLANNINGINTERACTION BETWEEN PLANNING

AND BUDGETING AND BUDGETING

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REQUIREMENT OF CAPITALREQUIREMENT OF CAPITAL

PROJECTPROJECT Preparatory works:Preparatory works:

-- Needs and demand analysis with outputNeeds and demand analysis with outputspecificationspecification-- Options analysisOptions analysis

a y eva ua ona y eva ua on-- Financial analysisFinancial analysis-- Economic analysisEconomic analysis

Risk assessment and sensitivity analysisRisk assessment and sensitivity analysis

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ContdContd….…. Professional analysisProfessional analysis

--Technology discussionTechnology discussion

--EIA/IEEEIA/IEE

--Legal and regulatory due diligenceLegal and regulatory due diligence Implementation readinessImplementation readiness

--Institutional capacityInstitutional capacity--Procurement planProcurement plan

Final summary matrixFinal summary matrix778/15/20128/15/2012



CAPITAL PLANNING PROCEDURECAPITAL PLANNING PROCEDURE

1. Defining and classification ofcapital expenditure

2. Identification of capital needs

3. Prioritization of capital requests

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ContdContd….….

4. Capital improvement programming

5. ssessmen an orecas o nanc acondition ability to finance capitalneeds

6. Selection of financial source(s) forindividual capital projects andexpenditures

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ContdContd……

7. Maintaining or improving bondratings

. u or za on o cap a pro ec s orexpenditures and appropriation offunds for them

9. Obtaining and managementof financing for projects

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OPERATING AND CAPITAL BUDGETOPERATING AND CAPITAL BUDGET

OPERATING BUDGET:OPERATING BUDGET:

Immediate future planImmediate future plan Affects how much we can wine and dine a Affects how much we can wine and dine a

clientclient

Developed by first estimating sales revenueDeveloped by first estimating sales revenue Market trends and pricing decision facilitateMarket trends and pricing decision facilitate

this forecast tempered with the capacity ofthis forecast tempered with the capacity of

the company to deliver the product orthe company to deliver the product orservicesservices

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OPERATING BUDGETOPERATING BUDGETLaborcost

R & D

Rawmaterials

OB Marketing

SalesOverhead

Utilities

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ContdContd…… Zero based budgetZero based budget

Developed by month and may differDeveloped by month and may differsignificantly based on timing of outlayssignificantly based on timing of outlays

on ore mon yon ore mon y Short term viability is checkedShort term viability is checked

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ContdContd…… CAPITAL BUDGET:CAPITAL BUDGET:

Developed for two reasons:Developed for two reasons:--ExpansionExpansion--ReplacementReplacement

-- Continuous evaluation of market conditionContinuous evaluation of market condition--Analysis of opportunities Analysis of opportunities Use of NPV method for analysisUse of NPV method for analysis Investment in the futureInvestment in the future Long termedLong termed

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FIXED AND FLEXIBLE BUDGETFIXED AND FLEXIBLE BUDGETFIXED BUDGET:FIXED BUDGET:

Static budget, projects static level of knownStatic budget, projects static level of knownincome and expenses over a set period of timeincome and expenses over a set period of time

income and expenses are not expected toincome and expenses are not expected tofluctuate through the duration of the budgetingfluctuate through the duration of the budgetingperiodperiod

Prepared based only onPrepared based only on ‘one level of output’ ‘one level of output’

Large variance is encounteredLarge variance is encountered..

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ContdContd….….FLEXIBLE BUDGET (VARIABLE BUDGET)FLEXIBLE BUDGET (VARIABLE BUDGET)

A fixed budget, adjusted to account for variable A fixed budget, adjusted to account for variableresultsresults

any expense or income accountany expense or income account

Designed to change in accordance with theDesigned to change in accordance with thelevel of activitylevel of activity attainedattained

Designed to change appropriately withDesigned to change appropriately withfluctuationsfluctuations

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STEPS FOR PREPARING FLEXIBLESTEPS FOR PREPARING FLEXIBLE

BUDGETBUDGET

Determination of budget variable

cost per unit output

Determination of budget level of

ixe cost

Determination of actual volumeof output

FLEXIBLE BUDGET

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REVISION OF BUDGETREVISION OF BUDGET

Increasefinancialstanding

REVISIONOF

BUDGET

Shift inSales

Variationin salary

Change inoperatingcondition

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STEPS FOR REVISION OF BUDGETSTEPS FOR REVISION OF BUDGET

Analyze budget

Make changes

Monitor and revise

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BUDGET CONTROL METHODBUDGET CONTROL METHOD

(AUDIT)(AUDIT)

Unbiased evaluation of a person, organization,Unbiased evaluation of a person, organization,

system, process, enterprise, project or productsystem, process, enterprise, project or product Can be done:Can be done:

--

--Externally (outside firm)Externally (outside firm)

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audit

financial Quality



AUDITING PROCEDURE AUDITING PROCEDURE

Recording

AUDITING Initials anddate of test

Summaryof testresult

Substantivetestrequired?

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andand WelchWelch remarks….remarks….‘ The budgeting process at most companies‘ The budgeting process at most companies

has to be the most ineffective practice inhas to be the most ineffective practice inmanagement. It sucks the energy, time,management. It sucks the energy, time,fun and big dreams out of an organization.fun and big dreams out of an organization.

It hides opportunities and stunts growths.’ It hides opportunities and stunts growths.’ - - Jack Welch Jack Welch

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WORK CITEDWORK CITED Capital Planning GuidelinesCapital Planning Guidelines

Havens, H., Management Controls, Audit andHavens, H., Management Controls, Audit andEvaluationEvaluation Lawrence, D. M., Vogt, A. J., Capital Planning,Lawrence, D. M., Vogt, A. J., Capital Planning,

Bud etin and Debt FinancinBud etin and Debt Financin Cah elCah el Hill SchoolHill School

of Government, 2007, North Carolinaof Government, 2007, North Carolina Office of Budget and Financial Planning, MITOffice of Budget and Financial Planning, MIT

Reports to the president; 2003Reports to the president; 2003--2004.2004. Smart Practices in capital Planning, The FederalSmart Practices in capital Planning, The Federal

CIO council, et al., 2007CIO council, et al., 2007 Water Sense Summer 1999Water Sense Summer 1999

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Many Thanks For YourMany Thanks For YourKind AttentionKind Attention

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capital planning and budgeting

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