Running your own business can be an endless cycle of planning, maintaining, and developing assets and resources. To keep your business well-balanced and organized, as a business owner, you have to identify potential investments and capital expenditures that will help your business operations and improvement. Identifying capital expenditure for your business will take you to various options on how to keep up with your competitors, develop the best business strategies to reach a wide range of customers, and to land on alternative plans to make a profitable business venture. Investing on a commercial site property, for instance, can bring more profits and opportunities to your business because it’s more accessible for your customers. In business, it helps to understand and weigh things properly so that you can come up with a game plan on how to expand your business and keep it running for a longer period of time. A plan that is carefully analyzed and executed can bring success to the whole company.
Here at Strikingly, we have a bunch of business owners with their own websites. This is why we thought it is a good idea to share a deeper understanding about what capital expenditure is and why it is important. We’ll also tell you what the types of capital expenditures are in terms of business operation and production process.
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Introduction to capital expenditure
- What are capital expenditures?
- What are the examples of capital expenditures?
- What are the types of capital expenditures?
- Why is capital expenditure important?
1. What are capital expenditures?
Capital expenditure can be defined as any funds that are spent in acquiring company assets to be used for more than a year. These company assets are used to help improve, develop, and expand business operations and production management. Sometimes, capital expenditures are referred to as Capex or capital expense which is the money used to purchase and extend the usage of fixed assets. It also includes the amounts spent to make changes or improvements to the location site, building, office interior, computers and softwares used in business operations, furniture, transportation vehicles, and even leasehold extension or upgrade.
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In an article by Accounting Coach, they stated that capital expenditures increase the respective asset accounts which are reported in the noncurrent asset section of the balance sheet entitled property, plant and equipment. Once the assets are placed in service they are depreciated over their useful lives. The accumulated depreciation for these assets is also reported as part of the property, plant and equipment. The amount of capital expenditures for an accounting period is also reported in the cash flow statement as a negative amount (since it is a cash outflow) in the investing activities section. Many financial analysts subtract the capital expenditures amount from the cash from operating activities to arrive at the company's free cash flow. This is how the Accounting Coach properly explained capital expenditure through accounting perspectives.
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2. What are the examples of capital expenditure?
- Purchase of fixed assets (furniture, property, machinery)
- Improvement of existing assets (long-term or fixed assets)
- Acquisition of computer information or software development
3. What are the types of capital expenditures?
Based on the Corporate Finance Institute, there are two types of capital expenditure:
- Expenses to maintain levels of operation present within the company
- Expenses that will enable an increase in future growth
A capital expense can either be tangible, such as a machine, or intangible, such as a patent. One way or another, both types of capital expenditure aim to achieve positive results and long term benefits for the company.
4. Why is capital expenditure important?
The importance of making the right decision is significant to the business growth and development. Hence, major decisions like how much money should be allocated to capital expenditures should be carefully made. Here are the reasons why you need to put high importance on properly investing on capital expenditure that will define the future of your business.
• Long-term or permanent effects
Capital expenditure can leave a long-term or permanent effect on the company in terms of production and profit management. Capital investment decisions can make or break the business operations. You have to foresight possible outcomes that may lead to long-term effects to the company.
• Difficult to reverse
While capital expenditure budget is very important, it is difficult to reverse in a way that could result in company loss and negative outcome. For example, in acquiring equipment and machinery for the production process, the organization should consider high-quality rather than used equipment that can affect the business production negatively.
• Can be very expensive
Truly, a capital expenditure budget can be very expensive at first. For business industries such as production, service providers, and plantation, the high initial costs on physical assets such as office or manufacturing building, machineries, and software technology usually cost a huge amount of money. Though it can be very challenging, you should realize that the importance of these capital expenditures plays a big role in the future of your company.
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Tips to efficient capital expenditure budgeting
• Start with a good structure
Many capital investments and projects involve huge amounts of funds that can be mishandled if there is no good structure at the very start. An organization should create a well-structured plan that includes the capital expenditure budget, its purpose and benefits, and most importantly a backup plan to reverse negative long-term effects.
• Think about long-term values
When you think about the long-term values and benefits of the capital expenditures you’ve acquired for your company, you can easily work things out and make it easier to make the right decisions. Whether you decide to buy capital assets with the existing company funds or with a debt, you have to carefully weigh between the two options and its effects. If you have identified the value of a specific capital expenditure and what it can do for your business, then you know that it’s worth the cost as well.
• Gather accurate data
Accurate data helps you make the right decision. For instance, you would know what specific quality or type of equipment is needed to increase the number of productions. Make sure that the data source is reliable so that you won’t get undesirable results in the future. Capital expenditure needs to be supported with accurate data to justify big decisions.
• Make it transparent
For a large company, the management of capital expenditure involves departments and employees. It is vital to form policies that maintain transparency along the process of acquisition and purchase. In this case, all operations and transactions are backed up with proper documentation that can be used by the company in case any problem may arise.
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Strikingly all-in-one business solution
Did you know that Strikingly offers an all-in-one business solution to our users? Business owners find our website features and services as an efficient tool to manage their company with ease. Our all-in-one business solution includes domain, business email, simple store, and hosting services. We also have SEO and marketing that can help establish a strong online presence and branding for your business. Our users understand the importance of capital expenditure to invest in maintaining and improving their business online and offline. In fact, most of our free account users find it ideal to switch to our monthly or yearly plan to invest on a secured, hassle-free, and all-in-one package solution to run their business anytime, anywhere. This is one good example of a capital expenditure that will totally shape a brighter future for your company in terms of audience reach, profitable income, and expansion. Anyone would love the idea of running their business 24/7 and at the tip of their fingers. Having only one platform to bill you is such a great help to manage accounting stuff in your own business.
Most business owners are making the right decision to invest in building a website for their business because it can save time, effort, resources, and even manpower. Investing in advanced software technology is one of the most important capital expenditures that many business owners consider nowadays.
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Key takeaways
Since capital expenditure is the money used to buy and improve or lengthen the life of a fixed-assets in a business, it is important to have a well-structured plan in order to be successful in investing on capital expenditures. An organization is venturing on something that may or may not benefit the company in the long run. Capital expenditures need careful analysis and research before a company decides to give it a go. Budgeting for capital expenditures should be thoroughly planned and executed. Once you have made the right decision from the start, you can never go wrong with the results.
Good decisions can help your business grow. With Strikingly, you can make the best decision to create a website with an all-in-one business solution. We can help you expand and manage your business with the best tools and services together with our team of experts. What are you waiting for? Make the right decision to build your business website with us now.
