Capital expenditures are necessary for a company to grow its current business operations. They are the part of the budget allocated to maintaining and improving the equipment and assets to keep the business running. They can also be expenses related to the expansion of the company by acquiring new assets.
Alternative name: Capital expenses, CapEx
For example, a plastic manufacturing plant may purchase property and infrastructure to expand its business capacity. All the expenses related to buying the property, buildings, equipment, and machinery would be capital expenditures.
How Capital Expenditures Work
Rather than being shown as an expense, capital expenditure is recorded or capitalized as a long-term asset. It is considered an investment because the company is expanding or maintaining its business and assets. Examples of common capital expenditures are purchasing long-term assets such as equipment, property, tools, infrastructure, machinery, warehouses, furniture, and vehicles; or intangible assets like patents and licenses. However, expenses related to the repair and general maintenance of an asset are not considered a capital expenditure. Instead, they’re classified as “repairs.”
Types of Capital Expenditure
The IRS categorizes types of capital expenses that businesses can capitalize: business startup costs, business assets, and improvements. These specific expenses may include:
LandBuildingsMachineryWarehousesFurnitureVehiclesSoftwareEquipmentIntangible assets (patents, licenses, trademarks, etc.)
In short, any expenditures related to acquiring new assets such as those listed above or upgrading these assets is a type of capital expenditure.
Capital Expenditure vs. Operational Expenditure
Capital expenditures are related to growing and improving the assets of a business. They are considered long-term investments. Operational expenditures (OpEx), on the other hand, are expenditures related to the day-to-day operation of a business. Here’s how they compare: A company that has a sound strategy for how they manage its capital expenditures can provide a potential investment opportunity. Of course, investors should consider many other aspects of a company before investing. After all, a company that takes its profits and reinvests them into promising, long-term assets may have a well-developed plan for long-term growth. Conversely, a company that does not focus well on investing in its growth may be headed for challenges.
