Operational Budgets vs Capital Budgets

Budgets
In budget planning, public administrators need to outline expenditures related to operational and capital budgets. In public administration, operational budgets are defined as day-to-day expenditures of a government while capital budgets refer to long-term investments for an organization. When creating budgets, public administrators are faced with the need to determine priorities for capital and operational budgets because of limited funding. The determination of priorities for operational budgets and capital budgets are affected by some factors, which are applied in the budget cycle. Similarly, capital budgeting process is affected by some factors that are applied in each budget cycle.
The most important factors that can affect the development of priorities for operational budgets relate to the three objectives of public expenditure management. In this regard, fiscal discipline, operational efficiency, and strategic resource allocation are important factors that influence the decision making processes of public administrators on priorities for operational budgets. These factors play a critical role in determination of priorities since they are the premise for public expenditure management. Additionally, these factors shape the link between policy and budgeting for both the immediate and long-term future (World Bank, n.d.). In public administration, operational budgets are based on public expenditure management, which implies that its objectives shape determination of priorities for these budgets. In each budget cycle, public administrators examine these factors based on the existing societal needs. For example, public administrators make decisions on expenditures through considering the societal needs in relation to public expenditure management.
Capital budgets are affected by different factors since the objectives of capital budgets differ from those of operational budgets in public administration. The most important factors that affect capital budgeting include organizational competitive strategy, demand forecast, cash flow, fiscal policy, and type of management. The evaluation of demand for a long period of time must be carried out during decision making for capital budgets. An organization’s long-term investment decisions are influenced by its competitive strength and position. Cash flow statements help an organization to determine the most suitable time for making investments while fiscal policy shape such decisions through influencing the ease of doing business for the organization. The future expected or projected cash inflows and outflows are estimated before determining an organization’s long-term investments (Schönbohm & Zahn, 2012). For example, when an organization is considering long-term investments in a future project, the project cash inflows and outflows are examined prior to making decisions on expenditures. These important factors in capital budgets are applied in each budget cycle through making a financial decision and an investment decision. Therefore, the organization decides to make a financial commitment to a project and commits to undertake a particular direction for future growth and profitability.
In conclusion, operational budgets and capital budgets differ in terms of their focus and decision making factors. However, there is a relationship that exists between capital budgets and operational budgets. This relationship is attributable to the application of capital budget elements in operational budget decision making. One of the elements of capital budgets that is included in operational budget decision making is cash inflows. As part of public expenditure management, public administrators consider cash inflows or revenue generated through taxation to make decisions on operational budgets. Cash inflows or revenues are taken into consideration when making decisions on public expenditures. Secondly, fiscal policy is a capital budget element that is applied to operational budget decision making. Fiscal policy shape the direction of public administration and in turn influence decisions on operational budgets like in capital budgets.
References
Schönbohm, A. & Zahn, A. (2012). Corporate Capital Budgeting: Success Factors from a Behavioral Perspective. Retrieved March 28, 2019, from https://www.econstor.eu/bitstream/10419/68243/1/733746489.pdf
World Bank. (n.d.). The Budget Preparation Process. Retrieved March 28, 2019, from http://www1.worldbank.org/publicsector/LearningProgram/PEAM/DorotinskyBackCh4.pdf