Businesses use different budgets to track their finances and make strategic spending decisions. Most companies employ both capital and recurrent budgets when managing their finances. Though these two types of budgets are different in nature, it's possible for them to impact each other.
A capital budget is used to evaluate potential investments or expenditures for specific projects or purposes. When a company draws up a capital budget, it is typically doing so to determine whether it makes financial sense to acquire a specific asset -- e.g., a warehouse or a piece of equipment -- or to pursue a new project. Capital budgets cover purchases that are expected to last more than a year. The amount a company spends on such purchases is known as a capital expenditure.
When a company creates a capital budget, it is usually with the goal of growing the business or increasing its value in the long run. However, the benefits of acquiring new purchases or pursuing special projects must be weighed against the costs involved.
A recurrent budget tracks ongoing revenues and expenses that occur on a regular basis, be they monthly, quarterly, semiannually, or annually. Also known as an operational budget, a recurrent budget includes line items such as wages, utilities, rent or lease payments, and taxes. It also includes purchases that are expected to last for less than a year, such as office supplies. A recurrent budget can help a company manage its money and come up with strategies for cutting day-to-day costs.
How capital and recurrent budgets interact
Capital budgets focus on business growth and improvements, while recurrent budgets focus on standard operations. Still, there are times when the two interact.
Capital expenditures can affect a company's operational budget. If, for example, a company purchases a new piece of equipment, then the item in question will come out of its capital budget, but if that equipment requires ongoing maintenance, then the maintenance costs will come out of its recurrent budget. Furthermore, a recurrent budget can help a company determine how much money it has available for one-time purchases. If, for instance, a company's operating costs increase, then it will have less money left over to allocate to capital expenditures. On the other hand, a company might choose to pursue a new project or acquisition if its recurrent budget shows that it has enough cash left over after operating expenses are accounted for.
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