Capital expenses will requite a unique line or a complete section in your start-up budget because you must keep those expenses separate from your other operating costs. A capital expense is money you plan to spend on things that are going to last longer than one year, are often fairly expensive, and are necessary for the functioning of your organization. It might involve the purchase of computers, a vehicle, or even a building.

Before you can figure out what you will need in the future and what dollar amount to attach to those needs, take stock of what you currently have. Capital expenses will be different for every organization, and to some extent they will be program-specific.

A direct benefit of the ongoing self-assessments the board should be undertaking (Chapter 12) is the ability to identify needs that the board believes would help the organization fulfill its mission. Some of those needs will involve capital expenses spread out over many years, which will also form the beginning of these line items in your budget.

Office equipment is a very common capital expense. For budget purposes, keep the equipment separate from the office supplies, such as paper and pens, because the equipment will outlast the supplies.

The reasons to keep a large capital expense separate are numerous:

• The costs involved may overshadow your general operating expenses, making it appear you are already in the red without having done a thing.

• It is likely the actual payments for these items will be prorated over many months, if not years. You must be able to show that clearly in your budget, especially if you are projecting the budget out three, five, or seven years.

• It will be to your advantage to point directly to capital expenses when discussing your funding needs with potential supporters. Many individuals and philanthropic organizations are restricted from directly supporting operations. You are permitted to get help offsetting capital expenses because it is considered a long-term investment in your organization.

Depreciation

No discussion of capital expenses would be complete without an understanding of depreciation. Factoring depreciation into your projected budget allows for accurate forecasting.

Depreciation is a means of measuring the amount of monetary value something loses from the time your organization purchases it to a set time in your fiscal year. It gives a very accurate picture of the health of the organization. You will use formulas to determine the value of depreciation of anything of value you report on your Form 990, so having these values in your current and projected budget is a good idea.

Calculating Depreciation

Generally, depreciation is calculated by dividing the cost of the asset by its useful life. If a $100,000 item, also called an asset, has a useful life of ten years, then you calculate depreciation by dividing $100,000 by 10 to get $10,000 per year.

Each year the organization must show that $10,000 as an expense of doing business, and these numbers need to appear in your projected budget. These calculations will also be entered on the Form 990, which you will complete each year. Adding the total amount of depreciation registered by all active assets gives your organization's total depreciation expense for that year, and that is what appears in line 42 of the 990.

Adding the total amount of depreciation charged to date against each individual asset since it was first acquired gives the accumulated depreciation shown in line 57b. Dividing line 57c by line 42a gives the accounting age of property, plant, and equipment.

There is a good reason for this level of detail about depreciation in a discussion about projected budgets. First, these numbers should appear in your budget. Second, these depreciation numbers will give any prospective funder an accurate — if sometimes unflattering — snapshot of your real financial health.

If your accounting age shows you are not able to replace worn-out equipment and are postponing the purchase of big-ticket items, it means you need a little extra assistance in that area and should be focusing your fundraising efforts accordingly. On the good side, if you are just starting out and the organization's main assets consist of secondhand office equipment and furniture from the local thrift shop, the accounting age will be very low and will look quite good in comparison to a group that owns a lot of things but is not able to upgrade regularly.