Chapter 6: Capital Budgets

Introduction

The small hospital where I worked after I graduated from nursing school was a community hospital. Although the staff offered excellent care, I couldn't help but notice the facility's outdated equipment and leaky roof.

After several years of financial troubles, the hospital closed. I quickly realized that its closure was directly related to its outdated equipment and poor physical condition. Clearly, those in charge of the hospital had failed to budget for the state-of-the-art equipment and facilities that patients in the United States customarily expect.

The budgets for these types of items are called capital budgets. Capital budgets, which are an important part of long-range and strategic planning, are used to budget for major movable equipment and fixed assets. Items in a capital budget typically have a lifetime exceeding the year of purchase. They are generally major investments; it takes a long time to recover their costs.

Why is a separate budget required for capital purchases? Because items in capital budgets are expensive. Also, they last a long time. Perhaps most importantly, the return on the investment in capital items will be seen over several years, not just the year of purchase.

Budgeting for Major Movable Equipment

Major movable equipment includes items that are expected to last for longer than one year but that will not be a permanent fixture in the organization. For example, computers, which generally last four to five years on average, are considered major movable equipment. Other examples include the following:

• Automatic blood pressure machines

• CT scanners and MRI machines

• Portable cardiac transport monitors

• Automatic external defibrillators (AEDs)

• Stretcher beds

Which capital items are placed in a budget depends on an organization's budgeting policies—specifically with regard to the minimum dollar amount of items that must be included in the budget. This minimum amount will vary from organization to organization. The total amount budgeted for major movable equipment will also vary from organization to organization.

Budgeting for Fixed Assets

In addition to budgeting for major movable items, you must consider fixed assets. Fixed assets are stationary. They do not move. A renovation of a conference center might appear in the capital budget as a fixed asset, as might a new building. Organizations can also purchase real estate for current or future growth and development; such purchases are also considered fixed assets.