In the Know: Structuring a budget for capital investments

July 25, 2019 By    

Q: What are the best ways to structure a budget for capital investments?

A:

The first step in preparing for capital investments is to produce not only an annual budget but also a long-term budget for five to 10 years out. (Photo: iStock.com/Drazen_)

The first step in preparing for capital investments is to produce not only an annual budget but also a long-term budget for five to 10 years out. (Photo: iStock.com/Drazen_)

The first step in structuring a budget for capital investments is to have a budget. While many companies may have a budget for the coming year, many do not have a long-term plan or budget for five to 10 years out. Long- term plans look at gallons, margins and operating expenses.

All budgets, long and short term, should incorporate capital expenditures. Capital expenditures are asset purchases that a company will use for years. Examples include bobtails, bulk storage installation, consumer tanks, software, websites, building improvements (such as roofing and siding) and tank monitors. The idea is to put something in place to avoid a crisis, like a bobtail breakdown in the middle of winter with no backup plan.

Look at your current hard assets, such as equipment and buildings. Which of these items will need to be upgraded or replaced in the next 10 years? Are there additional assets not currently used in the business that would reduce operating expenses or improve margins? Such assets could include propane or routing software, tablets or tank monitors.

Put these items on a timeline with a target or implementation date and include the estimated cost. If you are a retailer that is growing aggressively, capital expenditures will be an annual investment. Bobtails might only be replaced every couple of years depending on the size and age of the fleet. Bulk storage upgrades, building repairs and small equipment upgrades may be every five to 10 years. Again, it depends on the age of the asset. With a timeline in place, it is possible to determine if the expenditures are a good business decision.

Remember, a capital expenditure could fix or replace an old asset, help grow the business or increase the profitability of the company. Determine how a capital expenditure will affect the business. For example, if a bobtail is purchased, was it purchased to replace an old bobtail or was it added so the company can continue to grow? If it was purchased to replace a bobtail, how will that affect the future repairs and maintenance budget? A capital expenditure on an office building, in contrast, may not affect the budget from an operating standpoint, but it is something that needs to be done.

Retailers might have different agendas based on age, successors (if any) and profitability of the company. A retailer who is nearing retirement may not look to aggressively grow the business. If there is a successor lined up to come into the business in the future, investing in assets to grow the business may help increase cash flow in the future. These decisions are made based on what is needed to continue operations and what the return on the investment may be.

Based on your budget, should these types of purchases be made with the cash flow from the business or be financed? To determine this, you need to calculate working capital needs throughout the year. Working capital needs can vary due to volatility in the propane supply market. If propane prices spike, buying gas at more expensive prices can significantly increase your working capital needs. Are there enough funds throughout the year to make the purchase? Are there enough cash reserves to cover any unforeseen issues? If there is not enough cash to cover the capital investment and you choose to finance the expense, make sure the debt payments are serviceable.

Each retailer should plan based on the company’s long-term goals and profitability. There will never be a year a retailer hits budget exactly, but a plan in place is better than no plan at all.


Cooper Wilburn is a consultant at Propane Resources. He can be reached by calling 913-262-0196 or emailing cooper@propaneresources.com.

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