This budget should be set up based on the long-term goals of the organization. It is important to understand how these big investments are being utilized. Paying close attention to the training of employees on how to properly use these large expenditures. The desired return on investment (ROI) should be set for these expenditures as well to make sure for instance that the purchase of a new piece of equipment decreased the maintenance expenditure (Shim & Siegel, 2012). This discussion is aimed to present a concept of the capital expenditure budget that concerns the capital budget expenditure policy. Furthermore, explaining how it would be useful in analyzing capital expenditures with examples. Finally, stating how this concept could be used in long-term strategy and what are the disadvantages and concerns with the usefulness of this concept.
Usefulness of the Capital Expenditure Component
Analyzing the cash flow statement is a component of the capital expenditure budget that is important to consider because of the various sections that contribute to the overall change in cash position. There could be a situation in where the organization has negative overall cash flow for a given quarter, but this could be based on a heavy investment expenditure which could not be a negative thing (Hayes, 2017). This statement is essential because it provides a bridge of the gap between the balance sheet and the income statement. The balance sheet is the overview of company assets and debts; the income statement is an overview of the company revenue and expenses (Hayes, 2017). This statement gives the account of the money that is used in operating the company such as the employee work, financial information, and the investment for the company (Hayes, 2017). High capital expenditures suggest that the company is just growing.
Negative cash flows would be purchasing fixed assets (ex. Equipment), stocks, and lending money to other organizations (Hayes, 2017). Positive cash flow would be selling fixed assets (ex. Equipment), selling fixed instruments, and collecting money from loans and insurance (Hayes, 2017). Knowing what the positive and negative cash flow examples would help any HR manager with understanding how the organization functions based on its need for cash flow statements. Knowing when it is important to train employees on the use of the fixed assets is important so that there will be a profit made from the correct use of those assets.
If there is a significant fall in capital expenditure, then there is risk of significant loss. The cash flow statements can bring to life where the money is being invested based on the purchases of furniture, equipment, machinery, storage facilities, distribution facilities, and computers (Shim & Siegel, 2012). These expenditures should be planned for based on long-term study and continuous control and monitoring are necessary moving forward. If these expenditures are duplicated this can be considered ineffective and excessive cost (Shim & Siegel, 2012). There needs to be an updated representation of cost impact so that there can be reassurance that the expenditures are needed and up-to-date. The HR function may have a hard time applying this concept because it is not based on their scope of practice. Other than knowing what the training needed for employees on the capital expenditures are and the safety measures that are in place; that is really all. Although, failing to know these things could lead to a risk for the organization as well. Employees could be hurt or mess up something asset wise; and this could lead to a cost impact as well.
With every component of the capital expenditure budget policy I think it is essential to have follow up review as often as possible. This is especially important when this is a long-term budget that can change at any given moment. HR should become more familiar with all components of the budget policy so that they understand what is important for their department.
Hayes, C. A. (2017, November 17). Capital expenditure (CAPEX). Retrieved from, https://www.investopedia.com/terms/c/capitalexpenditure.asp
Shim, J. K., & Siegel, J. G. (2012). Budgeting basics and beyond (4th ed.). Hoboken, NJ: John Wiley & Sons.