Recently we discussed the importance of developing an operating budget for your business. Today, we will review the importance of developing a capital budget.
Unlike the operating budget which plans month to month activities for the year, the capital budget takes a longer view. In some cases it covers several years. Your capital budget plans for replacement or addition of long term or capital assets. Trucks, computers, washers, dryers, ironers, water heaters, small piece folders, boilers, loyalty card systems are examples of capital assets. Unlike operating assets like office supplies, capital assets have useful lives of 3, 5, 10 ,20 or more years. Although they have long lives they do wear out and will need to be replaced. When will they be replaced? How much will it cost? Will we need a larger washer at that time due to growth? Will we need a bigger ironer? As we grow when will we need to add another dryer? The answers to these questions will help you plan your financing needs in the future. Unless you plan to pay for these items from cash flow you will be borrowing money to pay for them. How much debt can your laundry comfortably handle? The answer will become clear once you complete you capital budget.
Long term and short term budgeting are critical exercises for laundromats, commercial laundries, hotels, motels, long term care facilties, hospitals, dry cleaners or any other business engaged in washing linens or clothes. The capital needs are larege. Why leave it to chance?