What is a capital budget?

Definition

A capital budget is the approved plan for major asset purchases over a coming period. On the books, this is a planning schedule, not a ledger account you debit and not a line on the Income Statement.

A two-location coffee company uses one when it plans a second espresso machine and a delivery van. Those buys will sit as fixed assets later; this document is the list that gets a yes or a no first.

It is a plan, not the spend itself. Capital expenditures are what actually go out; this page stays on the plan.

The plan usually covers a year, sometimes a quarter. It does not replace the operating budget for beans, wages, and rent.

Where it shows up

Cash flow: Related to the investing outflows this plan would create.

Balance Sheet: Related to the assets that would be added.

P&L: Related to later depreciation, not to the plan itself.

See also: Capital Expenditures · Budget · Payback Period

When you look at your reports, this plan does not print as a statement of its own. It lives in a schedule next to the annual operating plan, or as a tab the owners review before cash is committed.

When the list is large, the company is planning trucks, machines, or build-out. When it is empty, the year is meant to run on the assets already in place.

The Balance Sheet will show those assets only after a buy happens. The plan itself does not put a machine on the books.

The Income Statement is not hit when the plan is approved. Depreciation expense starts only after the asset is placed in service.

On the Statement of Cash Flows, the later buys will show as investing outflows. The plan is the warning that those outflows are coming.

How it works

Owners list the major buys they expect, with a round cost for each. They then decide which items get a yes for the period.

Each line is usually a long-lived tool, vehicle, or improvement. A $200 pitcher is still an operating supply; a $14,000 espresso machine is a capital line.

Stay with the plan when you read the list. Do not turn this page into a net-present-value walkthrough.

Do not treat approval as a journal entry. Nothing hits cash, assets, or profit until someone actually buys the machine.

A cash-flow forecast is where the planned outflows get a date. This page stays on the approved list, not on the week-by-week cash picture.

Payback period is one test people run on a line before they say yes. Return on investment is another; both are decision tools, not the plan itself.

After the year starts, actual buys are checked against the list. A van that was not on the plan is an exception, not a silent add.

A capitalization policy tells the bookkeeper which invoices belong on this list. Items under the threshold stay in operating expenses and never need a capital-budget line.

Example

Harbor & Hearth Coffee runs a downtown cafe and a roasting warehouse. For the coming year the owners want a second espresso machine downtown and a van that can move beans and wholesale orders.

They write a short plan.

| Item | Amount | | --- | --- | | Second espresso machine | $14,000 | | Delivery van | $22,000 | | Total | $36,000 |

The $36,000 is the capital budget for the year. It is not $36,000 of expense, and it is not cash that has left yet.

If they buy only the machine in March, actual capex year-to-date is $14,000 against the $36,000 plan. The van is still a planned line, not a Balance Sheet asset.

If the van price comes in at $24,000, the plan is $2,000 short on that line. The owners decide whether to approve the overrun or skip a different buy.

Approving the $36,000 does not debit an account. The later purchases will debit fixed assets and credit cash, or credit a loan, when they happen.

Common mix-ups

A capital budget is not capital expenditures. The budget is the plan; capex is the spend that actually goes out.

A capital budget is not the operating budget. Beans, wages, and rent live on the operating plan; machines and vans live here.

A capital budget is not a journal entry. Approval does not move cash or put an asset on the Balance Sheet.

Related terms

• Capital Expenditures: Spending to buy or improve long-lived assets.
• Payback Period: How long it takes an investment to return its own cost in cash.
• Return On Investment: The gain from an investment measured against its cost.
• Budget: The approved plan of revenue and spending for a coming period.
• Cash Flow Forecast: A forward projection of cash receipts and payments.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Net Present Value: The value today of an investment's expected future cash flows, net of its cost.
• Annual Operating Plan: The full-year plan tying revenue targets, spending, and headcount together.