Written by: Richard Frykberg

For all organizations, funding and resources are limited, and management is required to allocate available financial and human capital efficiently. The total amount of funding for investment in replacement of existing assets and in new growth or cost saving initiatives is typically agreed by management and stakeholders on an annual basis and described as ‘the budget’. Capital investment budgeting is then allocated to areas of responsibility and management authorized to spend these funds in accordance with a delegation of authority policy. Because most organizations are required to report to stakeholders and regulatory authorities on an annual basis, the budget is also typically considered to be an ‘annual’ budget.

Of course, most larger scale projects will span many years. How then do organizations best manage the dual concerns of investment approval for an overall amount, and annual budget expenditure in-line with cash flow and resourcing constraints?

Functionality of Capital Investment Budgeting

1. Budgeting vs Planning and Forecasting

Within SAP environments, budgeting is distinct from planning and forecasting. Budgets are a top-down concept that typically act as a hard limit to expenditure, whereas plans and forecasts reflect the projected expenditure over time. Most organizations will employ both sets of numbers: however, because of the strictness applied to budgets, this is the more critical control, and can cause the most frustration to managers seeking to execute on approved initiatives.

2. Overall vs Annual Budget Maintenance

SAP provides for setting both an overall budget as well as an annual budget. Annual budgets can be adjusted, provided that the sum of the annual budgets is less than the overall budget.

3. Capital Investment Budget Sources

Within SAP Investment Management, budgets are initially maintained in an investment program. Investment programs are defined by Approval Year (typically the fiscal year for which the program is prepared), and are broken-down into program positions relating to areas of responsibility and large individual initiatives.

Budget is maintained at each level of the program, in a top-down manner, so that the budget on lower-level positions can never exceed the total budget on the superior node. Within each position, an overall budget can be set, as well as an allocation by year. Whilst investment programs can be kept open concurrently, standard practice is to close the prior year program at year-end, and carry-forward available budget to the new approval year. A typical investment program, comprising a budget allocation for prior year, current year, and next year expenditure is illustrated below:

Figure 1 – Profile Budgeting with a budgeted expenditure per year

Profile Budgeting with a budgeted expenditure per year

Alternatively, where organizations are compelled to consider their capital budget in annual increments only, each annual budget will need to make provision for prior period committed expenditure, as well as current period commitments that will actually be incurred in future years only.  This budgeting approach is illustrated below:

Figure 2 – Annual budgeting with a provision for prior and future commitments

Annual budgeting with a provision for prior and future commitments

Note that the overall budget would be similar in the two cases as overlapping multiple year investment programs would have a similar impact on the current year.

4. Budget Distribution

Budget is distributed to investment measures (projects, internal orders and maintenance orders) which collect all the related costs of an investment initiative.  When distributing budget from an investment program position to a measure the budget must be distributed in parallel from the overall, prior, current and future budget balances. It is not logically or technically possible to distribute current year budgets to future years.

Figure 3 – Budget Distribution by Year

Budget Distribution by Year

Where organizations prepare annual budgets annually it is only possible to distribute budget to measures in respect of the current financial year, and this will need to be done annually for long-running initiatives. This annual distribution of budget to projects in relation to carry-forward, current and future projects is illustrated below:

Figure 4 – Annual Budget Distribution

Annual Budget Distribution

5. Investment Measures

The main investment measures employed for capital purchases are internal orders and projects. Both investment measure types can receive budget allocations and be status managed. Procurement activities on an investment measure can be prevented until the measure is budgeted and released. On technical completion, the accumulated costs on an investment measure are settled to one or more Fixed Assets.

Internal orders are effective for basic asset purchases and simple projects. Whilst internal orders may be grouped for reporting purposes, they are inherently independent cost objects with their own budgets, plans and actuals. Internal Orders are extensively utilized for their simplicity and ease of reporting.

Projects are more appropriate for larger capital projects as they are hierarchical and comprise of multiple Work Breakdown Structure (WBS) elements. Budgeting can be done at various levels of the project structure, depending on the degree of control required to be exercised. For example, for smaller projects it may be satisfactory to assign the budget to a summary top-level WBS, whereas for a larger project, budget assignment at the lower-level WBS elements may be more appropriate.

However, once a WBS is assigned to an investment program position, it is necessary to manage the budget assignment via distribution from the program, and it is not possible to directly transfer budget between WBS elements or fiscal years.

6. Availability Control

The key reason for implementing budgeting in SAP is to enforce procurement limits on an investment initiative. This is achieved by implementing ‘availability control’ on the budgeting profile assigned to the investment measure. There are two key design choices relating to availability control: whether to check expenditure against the annual or overall budget and what degree of tolerance should be allowed for any over-spend.

7. Status Management

Investment measure statuses play a key role in determining what business functions are allowed to be performed. Specifically, in the context of budgeting, procurement is normally only allowed when the measure is budgeted and released. Once a measure is technically completed, new purchases can no longer be placed, but final receipts and financial adjustments are possible. No further financial processing is allowed on closed measures.

In addition to system statuses, user statuses can be assigned to modify the standard rules. For example, when a measure is created early to support forecasting, user statuses can be applied to ensure that the measure is not used for purchasing activities.

Key Budgeting Challenges

1. Approval Levels

Most delegation of authority policies are based on the total cost of an investment, irrespective of financial year incurred. This may be in slight conflict with the ‘annual budget’ which is constrained to a particular financial year. Consequently, capital expenditure requests must state both the overall cost and annual splits, and budget must be distributed accordingly.

2. Opening and Closing Investment Programs

Technically, it is possible to have multiple years’ investment programs running in parallel. Normally, however, investment measure assignments are carried-forward from one year to the next, and the prior year investment programs are closed. The timing of these year-end activities is important: soon enough to allow supplements and procurement to occur in the new year, but only after the year-end accounting is finalized. Practically this means that two year programs will be open for a period of time, and care is required to ensure the integrity of processing and reporting.

3. Budgeting Project WBS Levels

When projects are used as investment measures, the Work Breakdown Structure (WBS) elements are arranged hierarchically and budget can be assigned to both higher-level summary nodes, and to the operative lowest-level WBS elements. Depending on size, nature and control requirements, it is common for some projects to be budgeted in both ways. Budget and transfer requests require the flexibility to support both approaches.

4. Annual Phasing Shifts

Because larger investment initiatives will invariably span financial years, it is imperative to support both an overall and annual budget. Budget shifts between both responsibility areas and between years needs to be accommodated. These budget shifts can be triggered ad-hoc, or as part of a compensating budget adjustment in a capital expenditure request.

5. Tolerances

Budget availability control is enforced within specified tolerances when raising purchase orders or making financial posting to an investment measure. Typically, warnings are issued at 70-90% of budget usage. Expenditure in excess of budget can be disallowed altogether, or only apply when actual expenditure exceeds say 105% of budget or by a fixed (low value) amount. Care must be taken to ensure that project contingency is consistently applied, and incorporated within the budget estimates, and that tolerances are not utilized for this purpose. Typically, when budgetary control is enforced, it is tightly controlled.

One of the practical reasons organizations do not enforce zero-tolerance policies is that this requires budgets to provide a degree of contingency, and it is practically difficult to ‘return’ this contingency to the program if not utilized.

6. Procurement Scheduling

It is the ‘scheduling lines’ on a purchase order that determine the relevant fiscal year for budget checking. These schedule lines are important to align logistics activities and for clear communication with suppliers. Sometimes schedule changes are unavoidable due to supply, freight or internal capacities. To circumvent inflexible budgeting, some organizations will manipulate these schedule lines in order to issue required orders. This behaviour can have severe downstream consequences, and it is much better practice to adjust the budget between years, if required, than to manipulate the schedule lines.

7. Budgeting vs Forecasting

Many organizations require managers to forecast their capital expenditure for the current and following years. This is then compared with the budget amount and actual commitments. The budget amount is typically distributed by month at the beginning of a year and saved as particular planning ‘budget’ version. Reconciliation of the budget, forecast ‘budget’ version and latest capital expenditure forecast versions can be confusing for business users.

8. Pre-approvals

Pre-approvals are required to enable purchase orders to be placed this year for a project that commences in the next fiscal year. In effect, pre-approvals create budget on next year’s investment programs so that it can be distributed to measures as budget for next year to allow purchasing to proceed. Without pre-approvals, procurement, and therefore benefits realization, would be delayed.

9. Carry-over

Similarly, this year’s budget will need to accommodate budget commitments from prior years. As the overall budget has already been approved, the remaining budget carried-forward from release measure is in effect pre-authorized for expenditure in the current year, and will reduce the amount otherwise available for new projects in the current year.


SAP supports both overall and annual budgeting. This provides an effective means of controlling capital expenditure, both in total and in terms of annual commitment. The mechanisms for managing budget on an investment measure directly within SAP are, however, cumbersome. Many organizations thus abandon stringent budget availability control within the system and revert to reporting mechanisms for budgetary control.

With IQX CAPEX, however, the easy-to-use applications provide an intuitive and process-aware mechanism for requesting, setting, and adjusting budget both on an overall and annual basis. Budget can be easily transferred between investment measures and between years for detailed budgetary control. The budget phasing on Capital Expenditure Request forms is automatically distributed to measures on approval for processing accuracy and efficiency. Unused budget can be readily returned when contingency is no longer required on a project.

By allowing the budget to be easily adjusted in accordance with management approval, purchase order schedule line manipulation is eliminated. Reporting automatically uses the current budget and latest forecast version for consistent and reliable analysis and monitoring. IQX CAPEX provides the tools to accommodate both carry-forward and budget pre-approvals to ensure that long-term projects are effectively controlled.

IQX CAPEX achieves detailed budgetary control whilst optimizing process efficiency.

Running SAP but still using Spreadsheets for CAPEX?

ebook about how companies are managing capex and their greatest challenges

This eBook gives practical steps for transformation.


We Can Still Help

Related Posts

If you enjoyed reading this, then please explore our other articles below: