Just 54% of small businesses have an official budget in place.
One of the most crucial aspects of managing the finances of a business is budgeting. It’s essential to know how much money is coming into and going out of your business. Errors in budgeting can lead to serious financial issues that can cause all kinds of problems.
There are various types of budgeting, and knowing the differences is important. When looking at operational budgeting vs capital budgeting. there are some similarities between the two, but also some ways in which they vary.
For operational and capital budgeting explained, keep reading.
What Is Operational Budgeting?
An operational budget focuses on a company’s projected revenues and expenses. This spans over the coming fiscal year.
Operational budgeting involves recording the expected cash flow that comes from both buying and selling. It also takes the effects on the company’s income statement into account.
Go here for an operational budgeting guide that offers some key tips and strategies.
What Is Capital Budgeting?
Capital budgeting is effectively a way of creating a budget that covers future purchases of things like machines, vehicles, and other fixed assets. If a piece of equipment suddenly breaks down, it may need replacing immediately. With a capital budget in place, you will already have some money in place to take care of this.
Without a capital budget, you would have to find this money elsewhere. Unplanned expenses could cause some serious issues if there are no funds set aside already. A capital budget will identify what’s needed, where the funds come from, and the expected returns.
Both operational and capital budgets require future planning. You should have a good idea of what you intend to pay for in the future, and how you’ll pay for it. You need to establish some sort of roadmap for each to ensure both budgets are large enough to cover what’s needed.
If you instead choose to leave things to chance, you may end up in situations where your business doesn’t have enough in either of the budgets to pay for things that are essential. This can lead to a range of issues that could be avoided with proper preparation.
Operational budgets are handled on an annual basis. The main activities include buying, selling, and paying bills. It’s typically quite predictable what the spending will be, and it can be adjusted each year as expenses change and your company grows.
Capital budgets are typically for unexpected expenses, so they’re not as easy to accurately predict. They’re paid from future cash flows and are based on the fund sources and purchases of various fixed assets. Capital budgets are sometimes planned yearly but can be for as long as 3 years at a time.
Operational Budgeting vs Capital Budgeting
When it comes to operational budgeting vs capital budgeting, both are crucial for the effective operation of any business. They both involve roadmaps to establish a suitable budget. Operational budgeting is based more on predictable, routine expenses, whereas capital budgeting is in place to cover unexpected expenses for fixed assets.
For more finance articles, check out some of our other blog posts.