Components of the Capital Budget
The capital budget determines the capital equipment that will be acquired; buildings that will be renovated, built or leased; the amounts that will be spent; and the estimated useful life that will be assigned to each of these assets. These elements will allow the finance team to determine the depreciation expense that needs to be included in the following year. Because depreciation expenses are part of the operating budget, capital budgeting decisions will conclude prior to the operating budget finalization. Before proceeding, let’s review what expenses make up a capital budget vs. an operating budget.
Capital Budget:
- Major moveable equipment
- Office equipment
- Clinical equipment
Magnetic Resonance Imaging (MRI)
Computerized Tomography Scanners (CT Scanners)
Positron Emission Tomography Scanners (PET Scanners), etc.
- Bricks and mortar
- Buildings
- Fixed equipment (e.g. boilers, wiring)
Operating Budget:
- Equipment costs
- Capital equipment maintenance
- Capital equipment financing
- Labor costs
- Salaries and benefits
- Education
- Other operating costs
- Operating supplies
Medical supplies
Pharmaceuticals
Office supplies
The key questions asked by administration when preparing a capital budget are:
How much money is being requested for capital items?
How much money can we spend on capital?
How are we going to decide which items to fund?
During the strategic planning process discussed earlier, the amount of money available for capital budgets is determined. Taken into account will be age of existing equipment, technological obsolescence, maintenance costs, and hospital expansion plans. Because the funding amounts are known, the main purpose of the annual capital budget is to identify the specific capital items to be acquired for the upcoming year. Most major expenditures require a capital proposal (or business plan) to be submitted 6-12 months prior to the desired purchase. The department manager requesting the capital will typically put together the working draft of the proposal. This will ultimately be submitted to the finance division for acceptability. The capital proposal will typically contain:
Description of the item
Support of the strategic plan
Justification of purchase
Financial impact of purchase and non-purchase on the market, department, patients, and staff
Preliminary price quotations
Decision criteria that should address the strategic initiatives of the institution
The question is, which capital projects should be funded?
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