What Is an Appropriation in Business and Government?
Appropriation refers to the setting aside of funds for a certain use. A business or a government may authorize money to allocate cash for operational needs. Congress makes appropriations for the U.S. federal government through numerous committees. A firm may designate funds for immediate or long-term requirements such as dividend payments, staff wages, and R&D.
An Appropriation Tells You What?
A company’s usage of cash and capital and the federal government’s budget both contain appropriations that show how money or capital is being distributed. Every year, governments make appropriations for federal cash for several initiatives. Capital allocation is another name for company appropriations.
Setting aside land or structures for public use, such as parks or buildings, is another definition of appropriation. The term “appropriation” can also describe when the government uses eminent domain to seize private property.
Government funding
The U.S. Congress passes appropriations bills to fund the federal government’s expenditures. The government’s fiscal year is from October 1 to September 30 of each year.
The U.S. President makes a budget request to Congress each fiscal year. Through a budget resolution process, the budget committees in the U.S. House and Senate decide how the discretionary component of the budget will be spent.
The procedure results in a financial allocation given to the several appropriations committees. The numerous subcommittees that represent the departments receiving the funds are divided up by the House and Senate appropriations committees.
Following are a few of the departments:
- Departments of Defense and Agriculture
- Ministry of Energy
- Department of Transportation
- Department of Labor
- Department of Commerce
Mandatory expenditures include government programs like Social Security and Medicare, which are funded automatically rather than through the appropriations process.
Supplemental appropriations bills are also passed by Congress when additional financing is required for situations such as natural disasters. For instance, the Consolidated and Further Continuing Appropriations Act of 2015 was adopted by Congress in December 2014. The act allowed $ 5.2 billion for domestic emergency responses to the epidemic and the battle against the Ebola virus in West Africa. The act also provided financing for eradicating the virus and creating new disease-curing medications.
Budgeting in Business
Corporate appropriations, or how a corporation uses its money, might include dividends, debt repayment, share buybacks, and fixed asset acquisitions. Property, plant, and equipment are considered fixed assets. In other words, a company’s capital spending allocation decisions impact investors and the company’s chances for long-term success.
Market players constantly watch how a business uses its funds or makes investments. Investors keep a close eye on companies to see if they are spending their capital wisely to increase shareholder value or using it carelessly, which can destroy shareholder value.
Keeping track of corporate budgets
Investors examine a company’s cash flow statement to keep track of corporate cash expenditures. The ability of a corporation to generate enough cash to cover its debt commitments and support its operational expenditures is measured by the cash flow statement (CFS). Three distinct behaviors or actions make up a company’s cash flow:
- Any sources and uses of cash from business operations, such as cash earned from a company’s goods or services, are included under operating activities on the cash flow statement.
- Any sources and applications of funds from a company’s investments, such as the acquisition or sale of an asset, are considered investing operations. Funds for financing comprise payments made to shareholders and funds obtained from banks or investors. This category includes the repayment of debt principal (loans), the payment of dividends, and payments for stock repurchases.
The Exxon Mobil Corporation (XOM) cash flow statement as of September 30, 2018, as stated in its 10Q filing, is shown below. The cash flow statement shows that Exxon’s top management appropriated the company’s cash and profits. $13.48 billion was set aside under the investment activities section (highlighted in red) to purchase fixed assets such as property, plant, and equipment.
$4.279 Cash billion was allotted to pay down short-term debt under the financing activities section (highlighted in green).
Dividend payments to shareholders were also included under financing activities, totaling $10.296 billion (highlighted in blue).
Since assessing the process of appropriating cash is very subjective, investors and analysts must decide if Exxon’s use of cash is effective. Some investors could want Exxon to dedicate more money to dividends, while others might want it to invest in the company’s future by acquiring and modernizing equipment.
Compared to allocated retained earnings, appropriations
Retained earnings (RE) designated for a specific purpose by the board of directors are appropriated retained earnings (RE). The amount of profit that remains after a corporation has paid out dividends is known as retained profits. Retained earnings build up over time like a savings account where the money is put aside to be utilized later.
Retained, appropriate earnings can be put to many different uses, such as stock buybacks, debt reduction, acquisitions, and R&D. There might be many accounts for appropriating retained profits at once. Normally, allocated retained profits are only utilized to communicate the management’s intended use of the cash to outsiders. Appropriation is the use of cash by a business to demonstrate how money is distributed, and the board of directors’ precise use of allotted retained earnings is described in the appropriation.
Appropriation Restrictions
The cash flow statement is a key indicator of a company’s financial health for investors since it shows how much cash is available for corporate activities, which is generally a good sign. However, studying how money is spent has certain limitations. Investors won’t be able to determine whether purchasing a fixed asset is a wise move, for instance, until the business starts to profit from the asset.
As a result, the investor can only speculate about how well the management is allocating or utilizing its resources. When a corporation chooses to expand its operations as part of its growth plan, this might occasionally result in negative cash flow.
An investor may obtain a clear image of how much cash a firm earns and get a strong grasp of a company’s financial health by looking at how it distributes its expenditure and spends its cash.
Conclusion
- Appropriation is the process of putting money aside for a certain use.
- A business or a government may allot funds as part of its budgeting procedures.
- Congress in the United States sets aside funds for the federal government.
