What is capital budgeting?

Capital budgeting refers to the planning and management of a company's long-term investments and expenses. This process is essential for organizations as it involves making decisions on which projects or investments to pursue, based on their expected returns and how they align with the company's strategic objectives.

Through capital budgeting, companies evaluate potential expenditures or investments that are significant in amount and duration, such as purchasing new equipment, launching new products, or investing in facilities. The goal is to analyze the viability and profitability of these investments to ensure that the company's financial resources are allocated efficiently and strategically for future growth.

The focus on long-term investments distinguishes capital budgeting from other financial processes, emphasizing the importance of forecasting future cash flows and evaluating risks associated with those investments. This strategic planning can shape a company's direction and influence its success in achieving sustainable growth.