Capital Budgeting: Comparing Short-term Vs. Long-term Costs

Capital budgeting is the act of laying out a financial plan for your business’s growth strategy. Looking at the short and long-term financial effects of a large purchase can focus your planning and help you make informed decisions. Assessing the project’s lifetime cash inflow/outflow determines if your business should move forward with the project or pursue other avenues.

Being able to see how decisions will affect your financial future gives your business a strategic advantage. For example, let’s say your business is planning on buying a new machine to increase capacity. You want to know if the added capacity is worth the initial investment. A capital budget looks at the initial cost of that machine, and assesses how that will affect your finances. Where it goes above and beyond is the budget’s ability to financially forecast.

Looking at the return on investment that the increased capacity yields, capital budgeting calculates the long-term cost of the machine. This also factors in maintenance, depreciation and other hidden costs that normal budgets would ignore. The end result is a picture of how much initial investment is needed, and if that investment will be worth your time in terms of lifespan value it will provide.

How Do I Make a Capital Budget?

While it is perfectly possible to make your own capital budget plan for growth, it is time-consuming. Knowing exactly how to calculate depreciation and value-added through taxes or tax breaks can be more work than it is worth. This is why most companies choose to use an outside source for calculating their capital budgets and return on investment.

At Froehling Anderson, we can shoulder that burden for you. We are a Minneapolis-based tax firm that has years of experience providing capital budgets as part of our suite of CFO services. We will sit down with you, discuss your growth strategy and put together a capital budget. Our experts can then offer advice based on the results and help you make informed decisions about your financial future. To set up an appointment and learn more about what our CFO services can do for you, contact us at 952-979-3159.