Capital Budgeting Decisions Simplified
A traditional capital budgeting technique or process is a series of measuring different analyses to determine whether or not future projects and expenditures are justified. This method could apply to a variety of different projects; from replacing aging infrastructure to investing in the Watson Supercomputer for a classroom. It used to be that tea leaves or runes were the only way to predict the future, but by implementing better capital budgeting techniques you can actually predict and plan expenses without any divination.
No matter the decision, the core techniques of capital budgeting remain the same. Three methods can be applied to achieve an accurate measurement: Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period.¹ A simple way to remember these three tactics is to think of them as handy facilitators in helping you N.I.P. all that guesswork in the bud associated with spending.
Net Present Value: Sometimes we invest money on items that we don’t expect any fiduciary return from, like the gourmet Manchego from that new organic market or the newest state-of-the-art flatscreen for your den. But at work, you have to show something for an investment. NPV calculates cash flow as a result of the investment against the cash flow needed to make the investment. This calculation also accounts for present and future value of money (inflation and foreign exchange rates).²
Internal Rate of Return: This is a percentage which helps determine whether or not a project is worth undertaking. Dividing the estimated gains by cost will calculate a percentage rate of returns. This percentage is then compared against other projects, where a minimum acceptable return is decided upon (called hurdle rate).³ Think of it like this; if you’re earning $150 dollars on average from buying and selling collectible coins, you’re probably willing to take a minimum return of $100 but not $20.
Payback Period: This is the amount of time it takes to recover the costs invested in a project. This method of calculation is falling out of favor since it shows bias toward quicker returns over long-term profitability.4
As a CFO or Chief Business Officer for colleges, universities or schools you’re likely searching for a better way to track costs and justify investments without harming the student experience. You’re here because you need a way to apply tried and true business principles (like Capital Budgeting) to an institution where many additional factors and external pressures are at play. Applying these techniques one to one may even feel a bit like comparing apples to oranges.
What if there was a solution that applied the proven results of a proper capital budgeting plan with the unique needs of your institution in a simple cloud-based software platform?
Apples to Apples: Capital Forecasting Provides Clarity and Peace of Mind
There are any number of methods educational institutions use for tracking their budgets. Some still cling to paper filing systems while others have embraced the digital age with spreadsheets and pie-charts.
Smarter spending goes a step further, because it’s not enough to just track expenses—they should be predicted. Good capital forecasting software provides the insight and support needed in the often chaotic hustle and bustle of 21st century schools so that you can get back to core essentials.
A great capital forecasting tool provides:
- A full view of your school
- Justification of needed resources
- Organization and prioritization of repairs
The advantages of adopting forecasting software are too big to measure with any pencil and paper. SchoolDude, a leader in cloud-based software specifically developed for educational institutions, provides a new capital forecasting tool that’s both expansive in its capabilities and simple to use.
Think adopting this software sounds too complicated? Think again.
Building a 30-Year forecast in three simple steps
- Answer these three questions: What is the age, square footage and type of my building?
- Already have an assessment? No problem, upload your data and transform that data into actionable insight.
- If you’re tracking life-cycles of equipment already, great! Upload that data into the software and gain a big-picture view of your school’s future expenses.
You don’t need to hold a MBA in business to implement effective capital planning in your schools. Visit us for a brief overview of each of SchoolDude’s products along with the top 10 advantages of using our software. Predicting the future is now easier than ever, so put away that crystal ball and contact us today to get started.
¹"Capital Budgeting Techniques - CliffsNotes." 2013. 24 Mar. 2015 <http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/capital-budgeting/capital-budgeting-techniques>
²"Net Present Value (NPV) Definition | Investopedia." 24 Mar. 2015 <http://www.investopedia.com/terms/n/npv.asp>
³"Internal rate of return - Wikipedia, the free encyclopedia." 2004. 24 Mar. 2015 <http://en.wikipedia.org/wiki/Internal_rate_of_return>
4"Payback Period Defined, Measured, Calculated, Examples ..." 2014. 24 Mar. 2015 <https://www.business-case-analysis.com/payback-period.html>