Certified Nonprofit Professional Practice Exam

What is the primary use of a capital budget?

1. For planning daily operational expenses

2. For planning major, nonrecurring expenditures

3. For funding marketing initiatives

4. For employee salary allocations

The correct answer is: For planning major, nonrecurring expenditures

The primary use of a capital budget is to plan for major, nonrecurring expenditures. Capital budgeting focuses on long-term investments that require substantial funding and typically involve significant physical assets, such as buildings, equipment, and technology. These expenditures are often not frequent and require careful planning and assessment of their impact on the organization's financial health. By establishing a capital budget, nonprofit organizations can prioritize which projects to pursue and ensure that resources are allocated efficiently to initiatives that will provide long-term benefits. This process involves forecasting the costs associated with acquiring or upgrading assets, justifying expenditures through analyses of potential returns, and planning how these investments align with the organization’s mission and strategic goals. In contrast, planning daily operational expenses generally falls under operating budgets, which handle routine costs like salaries, utilities, and supplies. Funding marketing initiatives and employee salary allocations are also part of operational financial planning, but they do not specifically relate to significant capital investments that a capital budget typically addresses. Thus, the focus on nonrecurring expenditures is a defining characteristic of capital budgeting.