Operating Budget and a Capital Budget: Difference

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Operating Budget and a Capital Budget: Difference

Capital and operating budgets are business plans meant to support the achievement of the necessary activities. They differ because the operating budget is focused on addressing immediate future needs while capital budgets are meant to support long-term goals. Operating plans usually run for one year, and managers can review and make adjustments in case of any deviation. On the other hand, capital budgets promote the internal investment strategy and can extend for more than five or ten years (Fried & Fottler, 2018). Although operating and capital budgets enhance business growth, they differ because operating budget supports daily activities while capital plans are intended to meet long-term goals.

The estimation of the sales revenue is usually the first step in the development of an operating budget. The next step is usually the preparation of an expense budget covering costs such as research and development, overhead, utilities, labor, sales, and raw materials. The budget is zero-based since cost estimates depend on forecasts by expense (Schmidgall & Kim, 2018). Their variances are monitored daily to make the necessary changes. Unlike operating budgets, capital budgets serve two main reasons: replacement and expansion. For instance, a company may decide to venture into a new market, replace old machines and introduce new products into the market (Fried & Fottler, 2018). The top executives are involved in ensuring that every proposal is scrutinized to make the right investment decision.

Operating and capital budgets differ because they have varying purposes in a business. The operating budget is meant to address daily needs to support the planning of short-term activities. On the contrary, capital budgets are focused on meeting the long-term goals of a business. They determine how the company will operate in the future. Based on their variations, managers are involved in the development and monitoring of the operating budget while top executives are involved in the development and execution of capital budgets.

References

Fried, B & Fottler, M (2018). Fundamentals of human resources in healthcare. Health Administration Press (HAP).

Schmidgall, R., & Kim, M. (2018). Operating budget processes and practices of clubs: a repeated cross-sectional study over four decades. Journal of Quality Assurance in Hospitality & Tourism, 19(4), 476-494. Web.

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