Capital Budgeting

by Don E. Vance, CCM (editor@clubandresortbusiness.com)
October 2007
 

When you present a budget for capital items, think clearly about real needs, and stay away from a "Wish List." Remember to always start by asking the question, "Is this a need, or a want?" And almost in the same breath, make sure to also ask, "If it were my money funding the capital expenditure, would I spend it?"

An equally important question that needs to be answered before any item is included on a capital budget list should be, "What about return on investment - will the purchase generate revenues, or is it being requested just because you want something new?"

In order to capitalize a purchase, it should cost at least $500 and have a depreciation value and a significant life. So unless you are involved with a startup operation, don't count something as a capital purchase unless it meets these criteria. Purchases of china, glassware, or small hand tools are often mistaken for capital expenditures when they're really operating expenses.

And if something does meet the criteria needed to be considered a capital expense, it must still be justified in terms of savings and payoffs for the property, along with a "cause and effect" analysis that can explain the reason for the equipment and the consequences of not getting it. For example, if a club is purchasing a lot of extra bulk ice because its existing ice machine is not capable of keeping up with demand, a "cause and effect" analysis will show the value of purchasing an additional or larger machine, vs. the added cost for the extra bulk ice.

Capital budgets should be shown for five years forward, showing the priority in each years for requested items. Including "cut" sheets, catalog photos and product specifications for specific requests, or even a completed purchase order form, will show that you've done your research and will help to speed up the approval process for items that are moved forward. Remember, too, that most properties will require bids, so quoted costs from potential vendors can also help to expedite actual purchases and negotiations, once approval is secured.