Accounting Best Practices, Fifth Edition

5–4. Establish Project Ranking Criteria

When it comes time for the annual budget process, the accounting staff is usually inundated with a flood of requests for funding capital projects. These are sometimes pet projects, others are for repairs or replacements, and still others are entirely new business propositions. The trouble is that a great deal of time is spent in sorting through them to see which ones are viable. Further, after the remaining ones are put in the budget, capital constraints typically lead to some of them being thrown back out. As a result, capital projects can be a bottleneck during the formation of the budget.

One can reduce this bottleneck by establishing project ranking criteria in advance and distributing this information to anyone who may be submitting a capital request. These criteria should itemize how funds will be allocated. For example, any project with a return on capital that exceeds a target level is a top priority; next in line may be any project needed to bring a company in line with government regulations, and so on. Once they see the criteria, budget participants may voluntarily eliminate some of their own requests. In addition, if the capital expenditure request form accompanies the ranking criteria, applicants can fill out all the information the accounting staff needs to sort through the various projects, making the accountant’s jobs much easier. This method not only eliminates some of the least probable capital projects up front, but also ...