What is the purpose of a capital budget?

The purpose of a capital budget is to forecast and control spending for long-term projects. This type of budget focuses on expenses that relate to the acquisition or improvement of fixed assets, such as buildings, machinery, and infrastructure. Capital budgets are crucial for planning investments that will benefit the organization over several years, ensuring that there is a strategy in place for funding these significant expenditures.

By separating capital budgeting from operating expenses, organizations can better evaluate the long-term financial impacts of their major projects and assess how these investments fit into their overall financial strategy. This allows for more informed decision-making regarding which projects will be funded based on expected returns, risk assessments, and alignment with strategic objectives.

Organization-wide, capital budgets facilitate comprehensive financial planning, helping to ensure that resources are allocated efficiently among competing long-term projects, rather than just managing day-to-day operational costs.