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What is Capital Budget Analysis for Facilities?

Capital Budget Analysis for Facilities is essential for sustaining the ability to maintain and continuously improve operations. Therefore, it is up to the Facility Management team to plan and justify a capital budget to support the institution.

Understanding Capital Budget Analysis starts with envisioning the numerous costs of running a workplace. Everything from maintenance to repairs, refurbishment, and the replacement of critical components influence how much the Facility Manager needs to budget. In addition, challenges arise when dealing with environmental health and safety, sustainability, corporate social responsibility, and other factors.

What is a Capital Budget?

A Capital Budget for facilities is a strategic plan that considers significant expenses needed to serve the long-term success of a facility or portfolio of facilities.

What is Capital Budget Analysis?

Capital Budget Analysis for facilities is the process in which facility managers evaluate significant expenses or investments.

In general, the goal of the capital budget analysis is to put various numbers into perspective. It provides context to the costs of physical assets against your organization's overall budgetary requirements.

Watch Intellis CEO Steven Warshaw explain how we transformed capital planning at the nation's largest school district.

Define capital needs by establishing a priority system for facility projects:

  • Mandatory projects
  • Discretionary investments

The distinction between mandatory and discretionary is not always obvious and often depends on the characteristics of the business strategy.

For example, expenditures to meet legal compliance or personal safety or to complete ongoing projects would prioritize replacing equipment or modernization of work processes. Initiatives that involved upgrading or creating new capacity in the workplace would have to have, at the least, a high expected ROI.

Although capital operating budgets are classified separately, they are interrelated. Proper and preventive maintenance will have a long-term beneficial impact on capital projects by extending the useful life of those assets.

Capital projects and investments require ongoing maintenance, care, and operation after purchasing or building. Therefore, it is crucial to understand how much capital expenditures have continuing costs on the operating budget. The expense budget should reflect these effects.

A life cycle cost analysis will account for the costs associated with a physical asset over its expected life, including the purchase, operation, maintenance, and disposal of the physical asset. Therefore, valid and convincing arguments for significant capital investments are based on a life cycle cost analysis and report proving to reduce operating costs.

Please read our guide to optimizing physical assets. 

What are the Goals of Capital Budget Analysis?

In general, the goal of the capital budget analysis is to put numbers into perspective. Thus, it provides context to the costs of physical assets against overall budgetary limitations and requirements.

  • Contextualize complex data points
  • Analyze and rank proposed projects
  • Determine which projects need investment

Capital Budget Analysis enables facility managers to decide which projects to fund and which to defer. This analysis relies on project rankings measured against benchmarks. If projects pass the standard, then they are worth pursuing.

Intelligent software, like FOUNDATION.Plans can make the Capital Budget decision-making process much more manageable. For example, a system that associates costs with building deficiencies prioritizes construction projects and performs in-depth analysis reporting.

Typically a Capital Budgeting plan takes into account:

  • Calculation of each project’s potential accounting profit by period.
  • Cash flow by period.
  • The present value of cash flows after time value for money.
  • The number of years it takes for a project’s cash flow to pay back the initial cash investment.
  • An assessment of risk and other factors.

Learn how FOUNDATION.Plans can make the Capital Budgeting process easier for facilities.

These reports are essential. They enable facility managers to prove to the CFO or other critical financial executives that the projects they want approval for are necessary for their long-term health.

What is the difference between Operating and Capital Budgets?

There are two types of budgets: operating and capital. Operating budgets relate to day-to-day expenses that the Facility Manager must maintain to run a facility effectively. It encompasses money needed for expenses like maintenance, utilities, supplies, furniture and fixtures, environmental quality, and security.

Operating budgets deal with more immediate expenses, impact the bottom line in real-time, and demand more attention. Therefore, planning the operating budget can take two different routes. One way to set the budget is through historical analysis or incremental budgeting. The second is zero-based budgeting.

Historical budgeting takes last year’s actual figures and adds a percentage to derive the current year’s numbers. It is the most common budgeting method. It deals with real costs and reflects any anticipated increase in commodities, utilities, labor costs, and the like. It also works to an FM’s advantage as the opportunity to grow the budget allows for continual improvement in the facility.

Compared to operating budgets, capital budgets are more strategic and relate to more considerable expenses that will serve the facility over time. Typically, they involve fewer cost types, less scrutiny, and longer terms and do not necessarily fall into the category of day-to-day expenses. As a result, facility managers are responsible more for controlling the operating budget than for the capital budget.

How does Software make Capital Budget Analysis for Facilities easier?

The most challenging part of Capital Budget Analysis is receiving approval. Facility department budgets are viewed as an expense. Generally, Facility Management is not a revenue-producing department. Therefore, cost avoidance and operational savings must be highlighted, not only when the budget is presented but on an ongoing basis. The value should be illustrated wherever possible, and expenses balanced by the benefits derived.

FOUNDATION makes getting approval on the capital budgets for facilities a lot easier.

  • Allows facility managers to generate comprehensive reports based on specific requirements.
  • Costing calculation enables report generation based on inspection deficiencies.

Our experts are here for you! Schedule a quick demo with us to learn how we can make the capital planning process a whole lot easier!