Pity the poor capital budgeting process. Even at its best, when things were flowing along smoothly, with steadily increasing sales, solid balance sheets, and growing equity, the capital budgeting process, in most firms, in the best of times, was an imperfect exercise in regurgitating numbers from prior years and tweaking past performance in new estimates to guesstimate the financial metrics needed in the year ahead. Within most firms, at their annual budget planning Olympics, there seemed to be two competing camps: the what-to-buy people vs. the how-to-pay people, with neither group really understanding the other yet both sides arguing passionately for their position and control of investment dollars or debt or both.
From 2001 through 2007 large numbers of firms saw unprecedented growth. Heady with optimism they "levered up" with acquisitions, new projects, recapitalization and substantial new debt based on the logic of spiraling successes and the expectation of continued "good times" and ongoing growth.
Along with 2008 came, what we now know as, the greatest recession since 1935. In 2009came the realization that reduced revenues have strained the fixed debt-service while maxed-out financial metrics pushed lending covenants to their limits, or beyond.
In 2010 many firms are grappling with their capital budgeting process knowing that their revenues may not support large budget outlays such as equipment acquisition at a time of continued economic uncertainty or gradual, sluggish performance.
Fortunately there is a business solution that balances capital budget fiscal conservancy with the need to acquire technology for growth and continued performance. Firms that need to invest in equipment, technology or systems can look to the operating budget to leverage outside financing that matches a monthly payment ( cost ) to monthly revenues and cash inflow. This timing solution often allows for an immediate "break even" vs. waiting for months or even years to achieve a break-even on a cash purchase.
For firms that need "off balance sheet" treatment special financing called Operating Leases may offer a special solution that preserves financial ratios. Financial decision makers should consult with their professional accounting, tax and legal experts to determine the most suitable financing solution to their particular situation and need.
The hallmark of good fiscal management is to find or create financial solutions that help achieve a firms' key financial objectives. As such an operating budget solution to a capital budget problem may offer a helpful approach to the need vs. budget dilemma.
