A capital budget determines funding for assets that produce income, and you will have to make decisions about which assets to buy based on a clear set of objectives. Without these objectives, you have no way of knowing how much money you need to budget for capital expenditures. Your capital budget objectives work with your overall business plans to provide a strategic road map for your company's future.

Setting Priorities

You don't always spend capital on growth. Sometimes you have to buy replacement equipment, for example. Your capital budget must clearly define priorities, especially when you are faced with the choice between maintaining current productivity and seeking additional income. Your capital budget should make provisions for spending on assets that will keep your core business operating, in addition to spending on new assets for growth.

Purchasing Assets for Positive Returns

An asset produces income. An asset also costs money. One objective of your capital budget should be to purchase assets whose net income runs higher than the ongoing costs of the asset. For example, consider a printing press that provides $500,000 of annual income and costs $200,000 in loan interest plus $50,000 in maintenance. This purchase would meet the capital budget objective of buying assets that produce positive returns.

Alignment with Marketing Plan

If you buy income-producing assets, but have no marketing plan for the products or services from those assets, they will go unused. An objective of the capital budget is to support the marketing plan with strategic purchases. The capital budget must clearly state criteria for meeting this objective. For example, the budget could say, "No expenditure for assets shall be made without a review of the marketing plan for that asset's output."

Keeping Pace with Projected Growth

Your growth projections depend on acquiring the assets that contribute to that growth. The capital budget must be built around the objective of making purchases that are timed with growth initiatives. For example, if you anticipate increasing sales by 50 percent over the next year, your capital budget must include money for assets that will help you produce or acquire more products. This could be production equipment, for example, or warehouse space to store additional inventory.

Least-Cost Objective

The capital budget should contain an objective of keeping costs low. For example, if you consider two assets that will both provide the same income, the least expensive one fits in with the least-cost objective. Your consideration must not focus on purchase or lease price only, but also on maintenance costs.

Keeping Debt in Line

Some capital expenditures require you to borrow money. The budget can include loans as part of its resources, but the need for an asset does not necessarily mean you can afford to service a loan for that asset. The capital budget must set an objective of keeping your debt within the limits you set.

Increased Retained Earnings

A capital budget should contain measures that will replenish the capital expenditure account. In other words, when you buy an asset, part of the income from that asset should go into retained earnings. Retained earnings do not get paid out as dividends or other distributions. The capital budget can earmark retained earnings from an asset for future capital expenditures. Meeting the objective of using retained earnings for asset purchases can reduce the need to borrow.

Anticipating Inflation

A capital budget should set the objective of keeping up with inflation. If you set a budget for an asset five years from the present, for example, that budget should include expected price increases. These increases will be estimates based on projected inflation rates, but estimates are better than omissions. You will have rough price estimates in mind for future purchases.