When recording your business’s finances, you should pay attention to capital expenditure. By analyzing this financial metric, you’ll have a better understanding of how much money your business spends on its tangible assets. Unless you’re familiar with the term, you may be wondering what is capital expenditure, how it’s used, and where it’s found in your company’s accounting records.
What Is Capital Expenditure?
Capital expenditure is defined as any business expense that’s used to purchase new tangible assets or improve a business’s existing tangible assets.
An example of a capital expenditure is the purchase of new equipment or machines. A manufacturing company, for example, may purchase new factory machines to facilitate its operations and produce more products. Another example of a capital expenditure is the purchase of building repairs and maintenance. A capital expenditure� is typically classified as any expense that’s used to acquire or improve a business’s physical or tangible assets.
Capital Expenditure vs Operating Expenses
Some business owners assume that capital expenditure is the same as operating expenses (OPEXs), however this isn’t necessarily true. Operating expenses are considered ongoing expenses that are essential to a business’s operations. Examples of operating expenses include payroll, inventory, rent, marketing and advertising. Because they are all ongoing and essential to the business’s operations, these expenses are classified as operating expenses.
Capital expenditures are typically one-time expenses that do not directly affect a business’s ability to perform its operations. Capital expenditures can help businesses grow and improve their operations, but they aren’t essential to its core operations.
The way that capital expenditures and OPEXs are taxed also differs. As explained by Investopedia, the Internal Revenue Service (IRS) only allows a small number of capital expenditures to be deducted from the business’s taxes for the year in which they were purchased. In comparison, most operating expenses are fully tax deductible for the year in which they were purchased.
Analyze Cash Flow Statement for Capital Expenditure
So, where you can find your business’s capital expenditures? You can find this financial metric on your business’s cash flow statement. Capital expenses are typically listed as an investment in a business’s cash flow statement. Alternatively, they may be listed as the purchase of property or equipment.
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