What are capital expenditures?

However, many companies lack knowledge about the best practices for implementing capex initiatives. By taking time to familiarise yourself with the concept, you can better leverage your existing capital to maximise growth potential and increase your profit margins.

Follow this guide to find out more about capex and how to maximise the effectiveness of capital investments.

• What is capex?
• Types of capital expenditure
• Capital expenditure vs revenue expenditure
• How to find capital expenditure
• How to calculate capex
• Examples of capital expenditure
• What is the difference between capex and opex?
• Where to find capital expenditure in financial statements
• How to write a capex proposal
• Is capex deductible?
• FAQs

What is capex?

Capital expenditure, or capex, refers to the funds used by businesses to purchase long-term assets intended for continued use. These expenses are essential in helping companies stay competitive in their industry by providing them with the resources needed to keep up with trends and developments.

From purchasing new equipment and machinery to investing in research and development, capex is a key component of any business strategy as it helps ensure that a company remains successful over time.

Capex plays an important role in business growth and helps expand operational capacity. However, managing capex can be challenging due to the substantial upfront costs involved. That's where HSBC UK's Asset Finance solutions come in, offering flexible financing options designed to help businesses acquire the necessary assets without straining their cash flow.

Types of capital expenditure

There are three main types of capital expenditure: maintenance capex, growth capex, and strategic capex.

• Maintenance capex, or maintenance capital expenditure, refers to the investments made by a company to maintain its existing assets and operations in good working condition, thereby preventing any decline in productivity or efficiency.
• Growth capex, or growth capital expenditure, refers to the funds a company invests to acquire new assets or improve existing ones with the objective of expanding its operations and generating long-term value.
• Strategic capex, or strategic capital expenditure, refers to the investments made by a company in long-term assets with the primary goal of achieving specific strategic objectives. These objectives could include expanding market share, entering new markets, diversifying product offerings, enhancing competitive advantage, or improving overall operational efficiency.

As companies grow and evolve, they may allocate capital expenditure across each category according to their business objectives. By understanding the purpose of capital expenditure, companies can make informed decisions about where to allocate capital to achieve their financial and strategic goals.

Capital expenditure vs revenue expenditure

When understanding capital expenditures, it's important to know the difference between capital expenditure and revenue expenditure. While revenue expenditures are typically used for day-to-day expenses, capital expenditures are investments in long-term assets that can benefit your business for years to come. Some benefits of capital expenditures include increased efficiency, productivity, and revenue growth.

How to find capital expenditure

To identify suitable capital expenditures for your business, follow these steps:

1. Analyse current needs: Assess your existing requirements, including areas where improvements or expansions could be made to enhance performance.
2. Understand your financial situation: Review your company's financial statements, cash flow, and available resources to determine how much you can afford to invest in capital expenditures.
3. Plan for future growth: Develop a strategic plan outlining your business's goals and the investments needed to achieve them. Consider factors such as market trends, customer demand, and technological advancements.
4. Evaluate options: Research various investment opportunities, such as purchasing new equipment, upgrading facilities, or acquiring another business. Compare the costs, benefits, and potential risks associated with each option.
5. Make informed decisions: Based on your analysis, choose the capital expenditures that offer the best return on investment (ROI) and align with your company's long-term objectives. This approach will help your business prosper in the long run.

How to calculate capex

Understanding how to calculate capex is crucial for businesses looking to grow and flourish. The capital expenditure formula involves determining the costs associated with acquiring, maintaining, and improving fixed assets such as equipment, real estate, and technology.

Proper budgeting for capital expenditures can help businesses stay on track and focused on achieving their long-term goals. By considering factors such as the life expectancy of assets, expected return on investment, and the availability of financing options, businesses can fine-tune their capex calculations and make informed decisions about how to allocate resources effectively.

Capital expenditure formula

The capex formula is used to calculate the total amount spent on long-term assets during a specific period. The capex calculation is as follows:

Capital Expenditures (CapEx) = (Ending Net Property, Plant, and Equipment) - (Beginning Net Property, Plant, and Equipment) + Depreciation Expense

Here's a breakdown of the components:

1. Ending Net Property, Plant, and Equipment (PPE): This is the value of the company's PPE at the end of the reporting period, which can be found on the balance sheet.
2. Beginning Net Property, Plant, and Equipment (PPE): This is the value of the company's PPE at the beginning of the reporting period, which can also be found on the balance sheet.
3. Depreciation Expense: This is the amount of depreciation expense for the reporting period, which can be found on the income statement or cash flow statement under "Depreciation and Amortization."

To calculate the total capex for a particular period, simply input the values into the above formula. Note: this method is most effective when analysing a single reporting period, such as a fiscal year or quarter. To analyse trends in capex over time, you'll need to review financial statements over an extended period.

Examples of capital expenditure

There are different types of capex, including the purchase of PP&E, as well as investments in research and development. It is important for companies to properly capitalise an expenditure and implement effective capex management practices to ensure that these investments are properly recorded and managed. By doing so, companies can optimise their return on investment and achieve their long-term strategic goals.

Capital expenditure examples:

• Purchase of PP&E: This can be land, buildings, machinery, equipment, vehicles, or technology systems.
• Business expansion: If a business decides to expand its operations by opening new branches or factories, the costs involved would be considered capital expenditure.
• Major repairs and renovations: Significant upgrades or repairs that extend the useful life of an asset or improve its value are also classified as capex. For example, replacing the roof on a company-owned building.
• Investment in technology: Purchasing new software, servers, or other significant tech infrastructure for improving business operations.
• Acquiring other businesses: When one company buys another, the cost of the acquisition is considered a capital expenditure.

What is the difference between capex and opex?

Capex definition refers to long-term investments in assets that provide value over time, such as purchasing PP&E or upgrading existing assets. Operational expenditure, on the other hand, encompasses the ongoing expenses necessary for running a business, including salaries, utilities, and maintenance.

By understanding the difference between capex vs opex, companies can effectively allocate resources, plan budgets, and develop growth strategies that balance capital expenditure and operational expenditure for long term success.

Where to find capital expenditure in financial statements

Capital expenditures can be found within a companies’ balance sheet and cash flow statements. Here's where to look for capex information in these documents:

Balance sheet:

The balance sheet provides a snapshot of a company's assets, liabilities, and shareholder's equity at a specific point in time. Capital expenditures are recorded under the “property, plant and equipment” section in the assets category. PP&E typically includes items such as land, buildings, machinery, and vehicles, which are long-term investments. To calculate capex using the balance sheet, you'll need the beginning and ending balances of the net PP&E and the depreciation expense for the reporting period.

Cash flow statement:

Capex in the cash flow statement shows how cash moves in and out of a company during a specific period. Capital expenditures can be found under the ""investing activities"" section of the cash flow statement. This section records all investments made by the company, including purchases and sales of long-term assets. Look for a line item called ""purchases of property, plant, and equipment"" or something similar to identify the capex amount for the reporting period.

It's essential to analyse both the balance sheet and cash flow statement to gain a comprehensive understanding of a company's capital expenditures and how they impact its overall financial health.

How to write a capex proposal

Crafting a well-structured and persuasive capex proposal is crucial for securing approval for your capital expenditure projects. By following these steps you can effectively communicate your capex plan and navigate the capital expenditure approval process.

Begin by outlining the proposed investments, their objectives, and expected outcomes. Ensure that your capex plan aligns with the company's strategic goals and long-term vision. Consider factors such as market trends, competitor analysis, resource availability, and budget constraints when developing your plan.

Consult with relevant stakeholders within your organisation, such as department heads, finance personnel, and executives. Discuss your capex plan, gather feedback, and refine the proposal based on their input.

This collaboration will help ensure that your proposal meets the needs of various departments and aligns with broader organisational goals.

Develop a comprehensive proposal for annual capital expenditures, including detailed breakdowns of each proposed investment. This document should serve as a roadmap for your company's capital expenditure projects throughout the year, allowing decision-makers to assess the overall financial impact and prioritise investments accordingly.

Collect relevant documents that demonstrate the need for the proposed investments and their potential return on investment (ROI). This may include market research reports, technical specifications, project timelines, cost estimates, and financial projections. Compiling this information will help strengthen your proposal and provide a solid foundation for your arguments.

With all the necessary information and documentation in hand, create a concise and professional capex proposal that clearly outlines the proposed investments, featuring your objectives and expected outcomes. Use clear language and incorporate the feedback received from stakeholders during the capital expenditure approval process.

When presenting your proposal to decision-makers, focus on making it as engaging and persuasive as possible. Emphasise the potential benefits and ROI of the proposed investments, as well as their alignment with the company's strategic objectives. Be prepared to answer questions and address any concerns that may arise during the presentation.

By implementing these guidelines, you can effectively write a capex proposal that stands a high chance of receiving approval and securing the investments necessary for your company's growth and success.

Is capex deductible?

Capex costs are typically large investments in long-term assets such as buildings or equipment and are not fully deductible in the year they are incurred. However, tax relief for capital expenditure may be available through various depreciation methods or special allowances, allowing businesses to recover these costs over time. While capex costs cannot be immediately expensed, they are still deductible over time through depreciation.

Proper capital expenditure accounting can help businesses manage their finances effectively and make strategic decisions for future growth.

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