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Capitol Budgeting Long Term Financing - Assignment Example

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The capital budget is a type of budget dealing with the provision of resources for the long-term running of a business or company while operating budget on is a budget concerned with the day-to-day operations in a business or a company. It is obvious then that capital budget has…

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Subject: Finance & Accounting
Type: Assignment
Level: College
Pages: 1 (250 words)
Downloads: 2
Author: ciaraschinner

Extract of sample "Capitol Budgeting Long Term Financing"

Effect of Capital Budget on Operating Budget Effect of Capital Budget on Operating Budget The capital budget is a type of budget dealing with the provision of resources for the long-term running of a business or company while operating budget on is a budget concerned with the day-to-day operations in a business or a company. It is obvious then that capital budget has a great impact on the operating budget. An operating budget should be ready for an annual operational cycle. Types of operating budgets include; the sales budget, production budget, labour budget.

Capital budgets in a company use up a lot of money in catering for future/long-term goals leaving only a smaller percentage of cash in the company for the daily operations that are essential for the daily running of the company. Consequently, the operating budget will be capital dependent on the long-term goals of a firm. Capital budget decisions are made independent of operating decisions. Consequently, managements make long-term capital commitments without understanding the repercussions for daily operations.

In addition, they are not flexible thought out the year from draft day to end of the financial year. In case an emergency arises at a certain point, it impose capital strains on the operating budget and the effectiveness of a company declines, as the management tends to cut the budget to respond to the emergency at hand (Mary Alexander, Infusion Nurses Society, Ann Corrigan & Judy Hankins, 2010, p. 137).Operating budgets in some firms operate on fixed asset depending on the season of sales.

They mostly entail heavy inputs that later give a considerable profited output. With capital budgets in sight and the knowledge that cash is limited, companies tend to pull out on some projects that have low yields and the amounts set for operations reduces accordingly. In conclusion, Capital budget is not solely responsible to affect operating budget, but plays a major role in determining the operations of a firm.

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