How to Budget for Capital Expenses Versus Operating Expenses

As someone who may be new to creating a budget or requesting purchasing equipment or consumables for a company, you will find it helpful to know how to work with a capital budget versus an operating budget.

The information in this how to article also applies to your home/household budgets, although we normally do not differentiate the purchase types unless we are talking about operating a business.

Classify those expenses by cost, scope of specific projects, and whether the items are consumables.

This step is where we get into the operating versus capital expense and classifying our purchases as such. Operating expenses are typically those you would pay for every year. Think in terms of consumable items, salary, leases, maintenance, insurance and all items you have to purchase or pay for every year.

Then add up the costs for your projects. Depending on the guidelines of your company, these costs will typically be classified as capital expenses. Capital expenses are those that are relatively expensive and are not incurred every year. For example, a new desk, new server, or a new roof are capital expenses. List these items as capital expenses.

Some business have unique rules regarding what does and does not get classified as a capital expense. For example, where I work, a purchase of 50 computers is an operating expense, where the pu rchase of one server is a capital expense. My company has some unique guidelines they must follow for budgeting.

If you are unsure, seek the advice of the financial person at your company, or an accountant.

Next, list all expenses relating to each of those projects.

When you are implementing something new, there are often many more expenses besides the initial purchase. For example, if you were purchasing 50 new computers, that computer purchase may also need to include new surge protectors, personal UPS' and other items used to set up the new machines. Budget each of those purchases as well.

Walk yourself through the whole process of your projects to try to be as accurate as possible on the budget you're creating.

Finally, budget for each item depending on how they fall when they are classified.

As the last step, you should now be able to quickly go through your wish list of items you would like to purchase next year to add up what to budget for your capital budget and how much for your operating budget.

Start by listing every project you would like to start or complete over the coming fiscal year.

The first step to starting your budget for next year is to pull out the budget from the previous year. List everything that you did not purchase last year, but hope to get next year. Then list every project you would like to work on next year. If you have items that are on a set rotation, do not forget to budget for those replacements.

For this step, do not worry about if it is a capital or operating expense since we will take care of that later.

Difficulty: Easy