Capital expenditures or CapEx for short describe a company’s funds that are mainly invested in maintaining, purchasing, or improving its long-term assets. These funds are used to boost the organization’s capacity and efficiency.
Capital expenditures can be of various types and include not only physical but also non-consumable or fixed assets such as equipment, property, infrastructure, and other resources that ensure improved company performance and financial wellness.
Also known as capital expenses, capital expenditures may have a crucial influence on various long and short-term financial aspects of the company. For this reason, organizations are supposed to make wise decisions, as they will eventually define the company’s health in the long run. So, what is included in CapEx? Investors may consider the following:
All of the above-mentioned capital expenditures can be divided into two major types
As stated earlier, experts normally highlight two common types of capital expenditures. They include:
Note: capital expenditures do not include funds the company spends on assets repair or maintenance. They refer to the income statement.
We have already mentioned the importance for companies to make wise CapEx decisions, especially when it comes to investing funds in expenses. It results in several fundamental reasons:
With the importance of CapEx and wise decision-making, capital expenditures come with a set of vital challenges all companies should take into consideration. They generally include:
The process involves several complicated phases. Specialists need not only to measure but also to identify and estimate CapEx-related costs, which can be a tough challenge.
Every organization is hoping to make accurate predictions in terms of potential outcomes when investing huge sums in capital expenditures. On the other hand, no one can ever guarantee those outcomes, while losses may occur quite often. Uncertainty often takes place when making decisions on how to invest in CapEx. This is where proper financial and budget planning is necessary.
As a rule, potential benefits and capital expenditures costs rely on long timeframes. It results in some difficulties when estimating discount rates or establishing equivalence.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.