How is "capital budgeting" defined in finance?

"Capital budgeting" is defined as the long-term investment planning and management process. This involves evaluating potential major investments or expenditures to determine their worthiness over time. Companies use capital budgeting to assess whether an investment is likely to generate future cash flows that justify the initial outlay of funds.

The capital budgeting process includes several steps: identifying potential investment opportunities, estimating future cash flows associated with those investments, evaluating the profitability of those cash flows using methods such as Net Present Value (NPV) and Internal Rate of Return (IRR), and ultimately making decisions on which projects to undertake based on their projected financial returns.

This process is crucial for businesses as it helps in making informed decisions about allocating resources to projects that align with their strategic goals and maximize shareholder value over the long term. It differs significantly from focusing on short-term financial management or merely tracking expenses, as it emphasizes the importance of long-term financial planning and investment.