Operating and Capital Budgets, Essay Example

Start-up of the bio-mass plant requires an initial capital investment of $2,066,000 for the equipment and startup needs shown in Table 1 below.  Although broken out separately project management, project engineering, freight, contingency, and start-up costs are part of the capital budget for the reason that the capital expenditures require these expenses to make the proper investment.  Initial plan Funding will provide the capital that is necessary to purchase the company’s assets.

The initial costs as detailed in the company capital budgets are needed to properly invest in the company and also to offset further costs in the future. It is also important to use such costs as a company buffer for future business strategies when including expenses in such a budget, and also in further plans for business growth. In particular, the table below summarizes the main costs and total investment as per the company requirements; this is a minimal cost in light of the major sales growth as aforementioned.

Table 1

Subsidiary debt mitigates issues for the company when dealing with firm growth (Kolasinski, 2009). Due to the operations sector of the business, a slight reduction in company growth will allow the business’ cash flow to increase once the assets become more profitable. Internally, the company will become more structurally sound and will overcome future problems related to capital investment and corporate debt.

For the purposes of internal investment, much of the start-up costs should be recovered during the initial stages of business growth. This will ensure that company debt does not increase, and capital budgets do not balloon out of proportion. The projected type of growth should be able to justify the costs as aforementioned, and will serve to build a solid foundation for future business profitability.

Table 2 below displays a sample operating budget for the bio-mass plant.  The plant experiences a net operating loss in year one but has sufficient cash flow to sustain it in years two through five.  Sales projections indicate sufficient cash flow to sustain operations after the first year startup losses.

As break-even is generally not expected in the first few years of operation, it is important to note that income from operation increases with every forecasted year. Therefore, the expenses are almost insignificant in comparison to such income predictions, as is the gross profit and other financial figures which promote the ability of the company to continue to maintain its growth for the future. As such, the bio-mass plant is expected to become a financially viable project for the company, as long as corporate costs and expenses are minimized, and gross profit figures continue to show signs of increase in the coming years.

References

Kolasinski, A. C. (2009). Subsidiary debt, Capital Structure and Internal Capital Markets. Journal of Financial Economics, 94(2), 327-343.

Stowe, I. D. R., Finnerty III, J. D., & John, D. (2007). Corporate Financial Management-3/E.