If you’re a business owner, you know the importance of monitoring your cash flow and predicting the trajectory of your growth. Capital expenditure (also called Capex) is vital to managing your company’s goals and assets.
What is Capital Expense in Accounting?
Capital expenditure is the amount of money spent on long-term assets during an accounting period. Basically, it’s the money that a company invests in assets that will help the company grow over time.
What Defines a Long-Term Asset?
A long-term asset is an asset that’s used within the business for more than a year. Some examples of long-term assets include: property, equipment, technology, facilities, and machinery. All of these items are investments that a company finances with the intent that they will see a profit as a result of purchasing them.
How Does Capex Relate to Cash Flow?
Capex is typically included in a company’s cash flow section of a financial statement. Because cash flow outlines the money going in and out of a business, it makes sense to include Capex in that portion of the statement—since it represents the money that’s flowing out of the business for long-term assets.
Why Is It Important to Predict Capital Expenses?
Monitoring and planning for capital expenses prevents businesses from growing too quickly or not making any improvements at all. Costs of Capex are usually substantial upfront, but are designed to support long-term improvements, so it’s important for businesses to be transparent about where those funds are going. That’s why including them in the cash flow section of statements is best practice for all businesses—large and small.
How to Calculate Capex
Finding Capex for your business is easy, but before you can figure out your company’s Capex, there are a few other figures you need first:
- Depreciation from income statement
- Property, Plant, & Equipment (PP&E) from current period’s balance sheet
- PP&E from previous period’s balance sheet
Once you have those three numbers, you can use the following formula to reach your Capex:
Current PP&E – Prior PP&E + Depreciation = Capex
If you’re looking to finance your Capex, contact a business banking consultant at Union Community Bank to get started. Whether you’re opening a new retail location or outfitting your office with new software, our team of business banking experts can help you find financing that’s right for your needs.