Capital Expenditures (CAPEX) are a necessary part of any business, and that’s especially true if you’re looking to acquire new equipment for your firm. These expenses revolve around the funds that a business uses to purchase and maintain new equipment, or upgrade existing equipment. Contrary to Operational Expenditures, which are day-to-day, Capital Expenditures focus more on long-term investments and assets designed to last a few years.
With the new year in full swing, it’s time we took a look at 5 tips that can help you plan for your Capital Expenditures, moving forward. Let’s look at each one.
#5) DETERMINE YOUR BUDGET
Capital Expenditures run the risk of going off the rails rather quickly, unless you’ve sat down and formulated a solid plan beforehand. Don’t neglect this step, and be sure to work within the budget you’ve established when you do. Your spending ceiling should be made of concrete, not glass. By staying within this budget, you’ll avoid any cost overruns, and be that much more prepared for your next round of expenditures. Be sure to break down the budget to determine how much will be spent on maintaining or upgrading your existing equipment, and how much will go towards acquiring new equipment. Resist the temptation to add more to the budget as you go. The objective is ROI.
#4) SEPARATE THE CAPEX BUDGET FROM THE REST
Capital Expenditures should be separated out
from annual budgets, and for good reason.
CapEx budgets can manifest themselves across a number of years, rather
than a 12-month period. There are too
many variables within this budget to keep them alongside an annual budget, so
it’s wise to
warden partition them off so you can maintain a fresh eye
over both. Annual Expenditures are a
class all their own, and have more in common with Operational
Expenditures. Be sure that your CapEx
budget stands on its own, so you can better gauge its effectiveness in the
right financial context.
#3) DON’T MIX CAPEX AND OPEX
A first-time business owner might make the mistake of associating Capital Expenditures with Operational Expenditures, but it’s wise to recognize the difference. By the same token, it’s also wise to recognize where the two can overlap, even if you’d rather they didn’t. Operational Expenditures are largely a day-to-day affair, whereas Capital Expenditures stretch out over a longer period. However, in the case of equipment maintenance or purchasing, it may also involve Operational costs such as staffing. A little foresight and some careful planning can keep both budgets clean and detailed, without unnecessary overlap.
#2) NO ROOM FOR GUESSWORK
When deciding on a CapEx budget, it’s all-too-easy to throw a number out and roll with it. Sometimes, this figure may be drastically inappropriate for the equipment in question. Other times, it could be unnecessarily high, thereby tying up funds that could be implemented elsewhere within your firm, or forcing you to spend where you needn’t. Make sure to do your due diligence and run the numbers to determine the correct amount for your CapEx budget. You may not get it 100% perfect, but the closer you aim for, the better off you’ll be, financially. Be sure to ask an adviser for help on this if you aren’t sure. The last thing any firm wants to contend with is a nasty surprise down the road.
#1) STAY ON TOP OF THINGS
Keep an eagle-eye view on your CapEx budget, and look at how it’s performing. If you’re new to the process, your CapEx budget can be an invaluable lesson in how to plan for future equipment purchasing and maintenance. Identify any errors you’ve made in your first round so that you can clean them up during the next CapEx cycle, maximize your profits and shorten their lifespan. Ask for advice, and put good practices into effect right away, so that you effectively optimize the entire process right from the start, and achieve better long-term ROI.
With the right practices in place, you’ll be able to tighten the belt, trim the fat and plan for your Capital Expenditures going into 2020, and well beyond! For more information, please get in touch with us today. We’d be glad to answer your questions!