3 Simple Steps to Establish a Capital Reserve Account

Posted by admin on November 7, 2010
Stored in Blog

We are going to take a short break from our discussion of Construction Management, and address a topic that I believe is going to be extremely helpful and useful as we all come to the end of the calendar year and start the process of planning for new budgets. I want to show you a very simple, and yet effective way of establishing a Capital Reserve Account. As a disclaimer, you all need to know that I am not an accountant (dropped it in college after 3 weeks). But we all need to be aware of how to establish certain mathematical equations and apply them to our field of endeavor.

First, let’s start with a definition of ” Capital Reserve”. According to Investopedia.com, the definition is:

A type of account on a municipality’s or company’s balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the company or municipality has adequate funding to at least partially finance the project.

In short, a capital reserve account is one that is established to save up monies to pay for a major capital expenditure when its effective life is over. For example, the average life of your HVAC systems may be 15 years. So, if you spend $100,000 on a new HVAC system today, how much should you set aside in a reserve account to have the adequate funds to replace it in 15 years? Is it $100,000? Is it more? Is it less?

To help us with this kind of planning…on a very simplistic basis…I have developed a “calculator”. This can be found on our website. This tool will help you establish an annual amount to be set aside in this type of account. You will only need to input 3 items (besides the name). SPECIAL NOTE - The current version, 2.0, of this calculator has been improved upon by Glenn Wood at Seacoast Church on 11/8/2010….THANKS Glenn! :

1. Current Replacement Value (CRV)

2. Expected Life Remaining – in years

3. The percentage of projected cost inflation per year

By inputting these 3 simple items, you can project the total replacement cost and the annual amount needed to be set aside. Now, you are all smart enough to know that this simplistic approach is not 100% foolproof….but it will get you close, and my guess it will get you a LOT closer than what you are currently saving for these items. There are going to be times when the percentage of inflation is going to be off or the years of life could be misjudged. But regardless, you will have set aside money to help you cover the cost instead of having to do a capital campaign just to replace carpet or buy a new HVAC unit.

Again, this is part of being proactive vs. reactive. We have looked at this many times….now it is time to start to take action.

Try this simple tool and give me some feed back. I would really like to hear from you to know how we can improve the calculator or to hear how you are putting these tools into action.