How to Prepare a Capital Expenditure Budget
A capital expenditure budget helps you assess if the long-term assets you’re planning to procure are viable or not. Here’s how you can prepare it.
What is a capital expenditure budget?
A capital expenditure budget (capital expense or CapEx for short) refers to the fund you use in buying and maintaining your business’s long-term assets. It includes tangible and depreciating assets such as:
- land or building,
- furniture, and
You can also consider intangible assets as capital expenses like:
- business license,
- patent, and
- research and development.
Any significant investments that help you make profits for more than one tax year fall under CapEx.
As a whole, your capital expenses must help you maintain and improve your operations and facilitate business growth. Preparing a well-thought-out capital expenditure budget lets you achieve this.
Steps to prepare a capital expenditure budget
Before we begin, take note that your CapEx is different from your operational expenses (OpEx). CapEx is for long-term and high-priced assets, whereas OpEx is the expense you incur for your daily operations. Some examples of OpEx are rent, utilities, payroll, and taxes. Both expenditures are important for your organization.
To secure a healthy bottom line, you must prepare a separate budget for each expense. Doing so prevents a negative cash flow. It also enables you to plan for manageable business growth and simplifies your taxes.
Tax deductions for CapEx are often spread out for a couple of years as depreciation. The deductions for OpEx, meanwhile, apply only in the tax year you incur them.
Here’s how to prepare a capital expenditure budget.
Evaluate your need for capital assets
Evaluate your existing capital assets. Figure out if you need to buy, maintain, or upgrade any of them.
Determine the asset you need to prioritize, and which ones to set aside for a while. As mentioned above, you also have operational expenses to pay. You must select which fixed asset is the most feasible based on your goals and financial situation.
For example, what do you need more right now: a new machinery or a new company car? If, for instance, your machinery causes a delay in production, then you must prioritize it. If it’s still new and doing fine, then you can consider buying a new vehicle, especially if you have frequent business trips. If you have a sufficient budget for both, you can go and invest your money. Either way, your capital assets must cater to your company’s growth and operational efficiency.
Get insights from decision-makers
To ensure you’re making the right investment decisions, it’s critical to talk to your company’s key decision-makers. They can be your department heads, investors, and other business leaders who are well aware of issues within your organization.
Work with them to find out any process or asset that needs updating or replacement. By following this bottom-up method, you can assess if your CapEx is beneficial for the long-term growth of your company.
List down and calculate the projected costs of assets
List down all capital assets your company needs based on your discussion with decision-makers. Research about its projected costs. Next, calculate the amount you’ll need for each asset.
Set a budget limit
Set a maximum spending limit once you know the cost of each asset. Consider your financial standing in the present as well as the future projections of your business. If you’re positive about getting an upward trend for your sales and revenues, you can set a higher spending limit. Otherwise, you can remain conservative while the market is still not doing well.
Compile your data in a spreadsheet
Finally, compile all the data you’ve gathered in a single spreadsheet. You can also use cloud accounting software for better recording and easier information sharing.
Putting all your numbers in one place lets you assess your needs better. It will also help you make good investment decisions.
Reminders when financing your capital expenditures
Your business needs capital assets to move forward. But it is not something you must invest in haphazardly. Because it involves a huge amount, you must take extra care in selecting which asset will be in the best interest of your business. Invest only in what can bring positive ROI.
If you have a limited budget for your capital asset needs, you can consider getting a loan. You can also explore other funding options for small businesses. Just remember to be prudent enough when funding your fixed assets.
Avoid borrowing more than necessary. Even if your business is doing well today, the future can surprise you with another economic slump similar to what happened during the COVID-19 pandemic. It might become difficult to repay your debts when this happens. There’s also a chance that your gains will be lower than you predicted.
Take risks when needed but not at the expense of your business. At the end of the day, remember that you’re seeking growth and stability, not downfall.