A capital budget refers to a financial blueprint detailing anticipated long-term capital expenditures for a company. These expenses encompass investments in new equipment, property, or stocks. The capital budget holds significance for companies as it facilitates monitoring spending and ensuring sufficient funds to cover forthcoming costs.
Creating a capital budget involves outlining a company's upcoming long-term investments. These can range from new equipment to constructing new facilities. To craft a capital budget, a company estimates the required investment amount and identifies means to finance these investments. Various methods can be employed for financing, such as issuing new equity, taking on debt, or utilizing cash reserves. Upon securing the necessary funds, a company designs a capital budget delineating specific investments and their scheduled implementation.
Three distinct types of capital budgets include:
A capital budget is crucial as it enables a company to oversee and manage its long-term investments, including property, plant, and equipment. It aids in making more informed financial decisions by evaluating potential profitability in new investments. Moreover, it ensures compliance with financial regulations.