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Planning and Budgeting for Capital Expenditures | WesBanco
Planning and Budgeting for Capital Expenditures
Investing money back into your business is an important way to support its long-term success.
To keep your business running efficiently, help your team work productively, and accommodate greater customer demand, it’s often necessary to invest in fixed assets like new facilities, facility upgrades, vehicles, or equipment.
Capital Expenditures vs. Operating Expenditures
Business costs are usually categorized either as capital expenditures (CapEx) or operating expenditures (OpEx). According to generally accepted accounting principles (GAAP), these expenditure types are treated differently on your company’s financial statements, so they can have different impacts on your budget, cash reserves, tax burden, and strategic position.
Typically, big-ticket purchases that offer long-term value are reported as CapEx, while year-round or short-term needs are treated as OpEx. In some cases, though, you may be able to choose whether an expense will be a capital expenditure or an operating expenditure. One example is software, which may either be purchased upfront or as a subscription-based service. Similarly, a company vehicle could be purchased outright or leased on a monthly basis.
In many cases, operating expenses are more manageable for small businesses because the costs are spread out and the full amount can typically be written off in the same tax year the costs are incurred. On the other hand, capital expenses are reported as assets on your balance sheet, which may increase your company’s attractiveness to investors.
As with most things in business, there’s no one-size-fits-all answer to CapEx vs. OpEx. In cases where you have a choice, your financial institution can help you make the best decision for your specific capacities and goals.
Planning for Capital Expenditures
When handled correctly, capital expenditures can support more effective operations and revenue growth. They’re an important part of your business’s overall financial plan. However, business owners often approach major outlays like these with trepidation.
This is understandable. There are many factors to consider when planning a major investment. Choosing where, when, and how much to spend can come with many uncertainties. It may feel safer to avoid major spending altogether – but being overly frugal can slow your business’s growth.
Performing a careful cost-benefit analysis when budgeting capital expenditures can help your company spend more efficiently and become more profitable over time.
Budgeting for the Right Assets
Let’s consider equipment as an example. Quality equipment is important, but it often comes with a major price tag. When considering a new equipment purchase, some companies simply guess about the impact of this expense. This mistake can cause a company to misjudge the expense’s value and fail to invest appropriately.
Instead, take time to model the increased revenue that could be enabled by increasing productivity with better equipment.
Short-Term Impact vs. Long-Term Benefits
When considering a purchase, it can be difficult to evaluate the item’s impact based on the dollar amount alone. To better understand what an expense will mean for your business, think about this number in terms of the metrics that matter to you, like billable hours, staff wages, or units sold.
Translating a price into a company-specific value can show how long it will take to earn back this amount. This also works when planning for multiple smaller expenses – such as new computers, software, or furniture. For a series of expenses over time, many companies prefer the flexibility of a business line of credit.
Measuring capital expenditures in terms of time or productivity can also help you gauge the potential benefits of better equipment, more employees, or a new facility. Look at your current operations and estimate how your capital expenditure would boost the daily productivity of your team – such as by streamlining processes, improving quality of work, or increasing output. Consider the value of this daily improvement when extended over months or years, and that should help you calculate the long-term benefits of your investment.
Capital expenditures can significantly deplete your cash reserves, so it’s often wise to consider financing options.
Modeling the financial impact of a major expense over time can help when applying for a loan or line of credit. By showing why an expenditure is necessary and how it will benefit your company’s growth, you can assure your lender that your strategy is sound and your loan request is practical.
Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.
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