CapEx Examples

This article was first published in February 2018 and was updated in November 2024.

Looking to learn more about Capital Expenditures or how to manage them better? Look no further.

Capital Expenditures, or “CapEx” for short, are expenses for physical goods such as machines and property that are expected to:

1. Provide value beyond the current financial reporting period.

2. Increase the ability or scope of the company’s operations.

Capital expenditure related items are reported on cash flow statements and balance sheets, typically associated with investments in property, equipment, and long-term assets.

Note: To learn the difference between CAPEX and OPEX, check out our article “CapEx vs OpEx.”

What is Capital Expenditure (CapEx)?

Capital Expenditure (CapEx) refers to the funds that a company uses to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. These expenditures are crucial for undertaking new projects or investments aimed at expanding the company’s operations or generating future economic benefits. By investing in CapEx, companies strive to enhance their revenue and profitability over time. Whether it’s purchasing new machinery, upgrading existing assets, or acquiring new technology, CapEx plays a vital role in a company’s growth strategy.

Types of CapEx

CapEx examples typically fall into two different categories. The first are expenses required to maintain a company’s current level of operations, while the second covers those necessary to encourage future growth.

CapEx examples might include a new printing press or a fleet of servers for your data center. These items are significant expenses that will provide value for many years and, therefore, can be capitalized over an extended period. Other examples include:

• Capital leases

• Computers/Servers/Related Equipment

• Equipment upgrades (that increase the value beyond normal maintenance)

• Furniture and fixtures

• Land

• Machinery

• Office equipment

• Real Estate (buildings, garages, etc.)

• Software (provided it meets your minimum)

• Vehicles

CapEx vs. Operating Expenses (OpEx)

Capital expenditures (CapEx) and operating expenses (OpEx) are two distinct types of expenses that businesses incur. The primary difference between them lies in their purpose and duration. Operating expenses are the costs required for the day-to-day functioning of a business. These include expenses such as rent, wages, utility costs, and office supplies. OpEx is typically fully deductible from the company’s taxes in the same year the expenses occur, making them short-term in nature.

In contrast, capital expenditures are long-term investments made to acquire or improve fixed assets like property, plant, and equipment. These expenses are not fully deductible in the year they are incurred. Instead, they are capitalized and depreciated over the useful life of the asset. For example, purchasing new machinery or upgrading existing assets to enhance production capacity falls under CapEx. By investing in CapEx, companies aim to increase their operational scope and future performance.

Calculating Capital Expenditure

Calculating capital expenditure involves understanding the changes in a company’s property, plant, and equipment (PP&E) and accounting for the current depreciation expense. The formula for calculating CapEx is:

CapEx = ΔPP&E + Current Depreciation

Where:

• ΔPP&E represents the change in property, plant, and equipment.

• Current Depreciation is the depreciation expense for the current period.

For instance, if a company’s PP&E increased by $500,000 over the year and the current depreciation expense is $100,000, the total capital expenditure would be $600,000. This calculation helps in understanding the total investment made in acquiring or upgrading long-term assets.

CapEx on the Cash Flow Statement

Capital expenditures can be found on a company’s cash flow statement under the “Investing Activities” section. This section includes all the investments made by the company in long-term assets, such as PP&E, as well as any proceeds from the sale of these assets. The cash flow statement provides a clear picture of a company’s investing activities, including its capital expenditures, and helps investors and analysts understand the company’s investment strategy and its impact on cash flow.

Impact of CapEx on Financial Statements

Capital expenditures have a significant impact on a company’s financial statements, including the income statement, balance sheet, and cash flow statement. On the income statement, CapEx is recorded as a depreciation expense, which represents the decrease in the value of the asset over its useful life. On the balance sheet, CapEx is recorded as an asset, and its value is depreciated over time. The cash flow statement, as mentioned earlier, shows the cash outflows related to CapEx. Understanding the impact of CapEx on financial statements is crucial for investors and analysts to evaluate a company’s financial performance and make informed decisions.

Capital Expenditure and Depreciation Expense

When a company makes a capital expenditure, it is recorded as an asset on the balance sheet. This asset is then depreciated over its useful life, which is the period during which the asset is expected to generate revenue for the company. Depreciation expense represents the decrease in the value of the asset over time.

For example, if a company purchases a piece of equipment for $10,000 with a useful life of 5 years, the annual depreciation expense would be $2,000. This means that each year, $2,000 is recorded as a depreciation expense on the income statement, reducing the asset’s value on the balance sheet. This process continues until the asset is fully depreciated.

Challenges with Capital Expenditures

Managing capital expenditures can be challenging for companies due to the significant upfront cash outlay required. This can strain a company’s cash flow, especially if the revenue generated is insufficient to cover the expense. Additionally, CapEx often involves investing in new and untested technologies or assets, making it difficult to predict and plan for future cash flows accurately.

The unpredictability of CapEx can complicate financial planning and forecasting. Companies must carefully evaluate the potential risks and returns of their capital investments to make informed decisions. This requires thorough analysis and strategic planning to ensure that the investments align with the company’s long-term goals.

Efficient Capital Expenditure Budgeting Practices

To manage capital expenditures effectively, companies should adopt efficient budgeting practices. Here are some tips:

• Structure your budget before you start: Having a clear plan and budget in place before making a capital expenditure helps identify the costs and benefits of the investment, enabling informed decision-making.

• Think long-term: Since CapEx involves long-term investments, it’s crucial to consider the long-term benefits and costs associated with the investment.

• Use good budgeting software: Leveraging budgeting software tools can streamline the management of capital expenditures, providing better control and visibility over the investment process.

• Capture accurate data: Accurate data is essential for making informed investment decisions. Ensure that all relevant information about the investment is captured and analyzed.

• Levels of detail should be optimal: The level of detail in your budget should be balanced. Too much detail can be overwhelming, while too little can hinder informed decision-making.

By following these tips, companies can manage their capital expenditures more effectively, driving long-term growth and profitability.

Additional CapEx Examples

CapEx expenses include intangible assets like a company’s ownership of a patent or license. On a cash flow statement, organizations typically outline all expenditures for a specific accounting period. Capital expenditure related costs are reflected in the cash flow and balance sheet statements, highlighting investments in property and equipment. Because CapEx expenses can significantly impact an organization’s short and long-term financial standing, companies must make intelligent decisions around their purchases.

Importance of CapEx Automation

While capital expenditures are among organizations’ most critical decisions, many struggle to manage a CapEx plan accurately. While ongoing investments tend to make companies more efficient, there’s always the risk that the purchase might not pay off, especially when dealing with a sluggish economy.

For that reason, it helps to have automation processes set up to improve the efficiency of approving capital expenditures. By having each potential purchase go through a streamlined review process, your organization can thoroughly review each expense and weigh the pros and cons of the investment.

Example of a CapEx Process

In larger enterprises, requesting and approving capital expenditures can be complex and involve many different individuals and departments. Automating the CapEx approval process can decrease acquisition time, improve accuracy and provide complete audit reporting. Here’s an example of an automated CapEx form that collects all the critical information for consideration by approvers:

(Click for Larger)

Net capital expenditure is calculated by subtracting the revenue generated from selling fixed assets from the total funds used for acquiring or improving those assets. Understanding net CapEx is crucial in financial analysis as it helps evaluate a company’s investment trends and overall asset base growth.

Once the form is completed, it can be routed through the organization for review, approval, rework, or disapproval.

Additional CapEx Automation Use Cases

Use cases you can incorporate into the CapEx automation approval workflow include:

New computer hardware purchase

Let’s say your company’s considering purchasing new laptops for your finance team. The goal is to enable them to work remotely to improve their work-life balance. With automation, you can create a form that allows stakeholders to answer questions about purchasing the laptops, like:

• How much do the laptops cost?

• How much additional support will the laptops require?

• How much of an increase in productivity will the laptop purchase generate?

• How much can the company save by letting the finance team work from home vs. in the office?

New Machinery and other fixed assets

A manufacturing company wants to increase cement production capacity to meet the demands of a growing industry. The company will invest in physical assets by buying new machinery to increase cement production within the next year to accommodate that goal. Organizations can set up an automation workflow to approve equipment purchases similar to that designed for purchasing new laptops for the finance department.

• How much more can the company make by increasing production?

• What is the cost of the new machinery?

• How much initial capital must the company put up?

• When does the company expect to start seeing a return on its investment?

We have an app for that! Get a headstart on automating your CapEx Process with our CapEx process app. Just import the app, customize it, and launch your new process.

Check Out the App

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FAQ

What is capital expenditure (CapEx)?

Capital expenditure (CapEx) refers to the funds used by a company to acquire or upgrade physical assets like property, machinery, or technology expected to provide long-term value.

How do CapEx and operating expenses (OpEx) differ?

CapEx involves long-term investments in fixed assets, while OpEx covers short-term costs for daily operations, like rent and salaries.

Why is CapEx important for a business?

CapEx is crucial for growth, allowing businesses to invest in new assets that can enhance productivity and drive future revenue.

How is capital expenditure calculated?

CapEx is calculated by adding the change in property, plant, and equipment (PP&E) to the current depreciation expense.

What role does automation play in managing CapEx?

Automation streamlines the CapEx approval process, ensuring efficient reviews and better tracking of expenditures to enhance decision-making.