What You Need To Know About Capital Expenditure Planning

Capital expenditure refers to expenses that help a business to generate revenues beyond one current tax year. Capital expenditure varies widely and often includes the purchase of equipment, constructing business premises and so on. To distinguish between capital and operational expenses, think of a restaurant. The cost of building the restaurant and fitting kitchen equipment such as ovens and freezers is capital expenditure. The annual expenditure on gas, lighting and so on that are needed to keep the restaurant going are operational expenditures.

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Capital expenditure is often significantly more than operational expenditure. For this reason, it makes a lot of sense for a business to plan properly before making any capital expenditure. Here are some tips on how to go about capital expenditure planning.

Separating Capital Expenditure From Other Costs

Capital expenditures are very different from other costs and many companies find it prudent to keep these costs separate from others. This is not just about the amounts involved but also how the expenditures are accounted for when it comes to taxation. Operational expenditures are accounted for every year while capital expenditure is spread over a number of years.

Getting Departments to Input

Capital expenditure tends to have an effect on the entire organization. For example, if a company is contemplating buying a heavy-duty printer/copier, chances are that the equipment is going to be used by several departments. Getting their input when it comes to capital expenditure is critical as it ensures that all needs are met. Given the amounts involved, making a mistake when it comes to capital expenses can have a serious effect on the operations of a company.

Cap the Expenditure

Given that capital expenditure can go really high, it is important for the organization to determine how much they want to spend on their capital expenses. Once this cap is determined, the company can then develop separate caps for different capital expense allocations. For example, how much money should be spent on an equipment purchase, acquiring other companies and so on. With the caps in place, the company then plans around these parameters. Doing this helps the company not to overstretch and ensure that any repayments to these capital expenses (in the case that the company took a business loan to cover these expenses), can be easily repaid.

Calculate Expected Returns

A critical element of capital expense planning is to determine the returns on capital expenditure. Doing this means setting up parameters on how the returns will be measured. For example, the cost reduction brought about by in-house copying and printing vs. the amount spent on a new copier. This way, the company is able to determine if they are getting a proper return on their capital expenditure and any lessons that can be learned to improve the next round of capital expenditure.

When it comes to capital expenditure, it is important for any organization to see the broad picture. Returns on investment are likely to span several years and the ability to make accurate predictions will help make better capital expenditure plans. Working with a business loan service provider can also make all the difference when it comes to structuring and repaying your loan.