Within business the term ‘capital expenditure’ is often used; you might also see it written as CAPEX, or investment expenditure. When we talk about capital expenditure we are referring to those investments that will produce rewards at some time in the future. This investment could occur in any number of ways such as buying new equipment for a factory or developing current resources. It is usual to view capital expenditure as those investments that will provide a return for longer than just one year.
Examples of Capital Expenditure
In order to make it clearer about what we mean by capital expenditure it can help if we provide a few examples of it.
- A company that buys new machinery that will help to increase production (fixed assets)
- Money spent improving a business premises
- Money spent on copyright or trademark protection
- Making a building more secure by adding alarms and other security devices.
- New furniture of the office
- Purchasing company vehicles
- Additions to a current asset — for example new software for your computer that will mean it can do more functions
- Money spent for relocation to a new premises
- Money spent on research development
These are just some examples of capital expenditure and there are a lot more than this.
Why it is Important to Identify Capital Expenditure
There are many good reasons why we might want to identify capital expenditure by a company. For tax purposes this type of expenditure is also sometimes referred to as investment in plant, property, and equipment. Here are just some of the reasons why we might want to look at this aspect of a business.
- It is needed when dealing with paying taxes as capital expenditure needs to be capitalised. With this type of investment you can’t claim it in the same tax year as it was made, but instead it is classed as a deduction for as long as it is providing something for the business
- It is important to identify capital expenditure when trying to put a value on a business
- If a business is trying to drum up investment then they will need to provide a lot of information about the assets and deficits in relation to their company. The capital expenditure will be one of the assets that they will want to show off to potential investors
- Information about capital expenditure should be included on any business plan
- When it comes to selling the company it will also be important then to identify any capital expenditure
Some Final Thoughts on Capital Expenditure
It is hard to imagine any business that can get away without having some type of capital expenditure. Even the simplest online company will at least have paid for their domain name. Some of the bigger companies will have millions of pounds invested in capital expenditure. Investing in this type of outlay is usually advisable because it can lead to such high rewards in the future; you have to spend today to gain tomorrow.
