A recurrent budget consists of regular revenues and ongoing expenses. Companies may use a recurrent budget to account for expenses that occur monthly, quarterly, semi-annually or annually. A capital budget consists of non-recurring revenues and expenses. Companies may use a capital budget for special projects.
Recurrent Expenses and Revenue
Recurrent budgets include recurring expenses such as wages, taxes, lease payments, insurance and utilities. Recurring revenues can best be described as the revenues a company earns and expects to continue to earn from its ongoing operations. For example, a paper company receives recurring revenue from selling reams of paper. The paper company can reasonably expect to continue to receive this recurring revenue in the future.
Budget makers must account for recurring revenue and expenses in its recurrent budget. If the company finds that expenses are higher than originally estimated, it can adjust the recurrent budget accordingly by cutting down expenses wherever possible. If revenue growth is equal to expense growth, no adjustment may be necessary. If revenue growth increases while expenses remain unchanged, the result may be higher profits or net income for the company.
Capital Expenses and Revenue
Capital expenses are expenses to complete a non-recurring purchase or to complete a non-recurring project. For example, if a company purchases a new plant this year, the cash outlay for the purchase does not occur regularly. Capital revenue is revenue from a special project or event that is not expected to continue into the future. For example, a metal die-cast company that makes auto parts accepts a special project contract from a toy company to make die-cast metal cars. The metal die-cast company receives revenue once the contract for the toy company is complete. Since this revenue is not from its normal business operations and is from a special project, the revenue the company receives is non-recurring.
Capital budgets are necessary to account for the expenses and costs associated with special, non-recurring projects. If budget-makers do not anticipate that the revenue from the special project will exceed its costs, it will likely not take on the project. For instance, assume the metal die-cast company from the example in the previous step discovers that the estimated cost to accept the special project exceeds the revenue it would earn from the contract. As a result, the metal die-cast company would likely turn down the offer from the toy company.