Capital expenditure, otherwise referred to as CapEx, is the money a business spends on major, long-term assets such as property, equipment and technology. Companies often use CapEx for new projects or investments that support business growth and expansion, such as purchasing office premises, manufacturing facilities, or equipment.
"Measuring CapEx is crucial for businesses," says Dominic Monkhouse, business coach at Monkhouse & Company. "Ultimately, understanding and controlling CapEx assists businesses in achieving growth, operational efficiency and financial stability."
Understanding capital expenditure (CapEx)
CapEx refers to long-term investments in fixed assets, which have a useful life of more than a year. It is measured by taking the upfront investment and spreading it across the useful life of the asset. Any costs incurred in maintaining or repairing these assets, provided they extend their useful life, can also be included in CapEx calculations.
By measuring and tracking CapEx, businesses are able to evaluate the potential return on assets and ensure funds are directed towards projects with the highest strategic value, says Monkhouse.
For Gautam Ghai, the London-based Co-Founder and CEO of global IT services provider SourceFuse Technologies, monitoring CapEx enabled him to weigh up whether or not to rent or buy laptops for his employees.
"We bootstrapped the company, so initially we didn't have any money that we could invest in CapEx," Ghai says, so he hired laptops for his staff instead. While that made sense at the beginning, over time Ghai worked out that over a 3-year period, renting laptops was about two-and-a-half times more expensive than buying them.
Monkhouse explains that tracking CapEx can also inform your financing choices, such as whether to use internal funds, secure loans, or seek external investment. During the pandemic, Ghai says it became harder to finance the purchase of laptops for his growing company. "To remedy this, we used debt instruments," he says. The company had previously been debt-free, but Ghai says it made more financial sense to raise debt and purchase laptops than continue to rent.
What are the different types of CapEx?
There are two main types of CapEx, collectively known as fixed assets. They can be tangible or intangible and appear on a company’s balance sheet, with an estimate for their depreciation, or how much wear and tear is likely to reduce their value over time.
Tangible fixed assets
Tangible fixed assets are long-term assets that are not easily converted into cash. They are usually physical items like property, warehouses and equipment and they appear on your balance sheet as PP&E, or Property, Plant and Equipment. For Ghai, laptops and equipment, such as printers and screens, are his largest CapEx investments.
If, like Ghai, you are looking to invest in company computers, then the American Express® Business Platinum Card gives members up to £150 in statement credits annually that can be used for UK purchases with Dell¹. In addition, it has up to 54-day payment term that gives you more flexibility and control over your cash flow when making large purchases².
Intangible fixed assets
Intangible fixed assets are those that do not have a physical form, such as intellectual property, trademarks, patents and design rights. Like tangible assets, they depreciate over time and this is known as amortisation.
How to calculate CapEx (with formula)
The CapEx formula
The CapEx formula does not include intangible fixed assets. Instead, it takes your tangible fixed assets in the current and previous reporting period and estimates how much they may have depreciated in value over that time. They appear on your balance sheet as PP&E and the formula is as follows:
CapEx = PP&E (Current Period) – PP&E (Prior Period) + Depreciation (Current Period)
CapEx formula example
Start by obtaining your company’s income statement and balance sheet for the past two years. The value of your tangible fixed assets will show as PP&E on your balance sheet and depreciation will appear as a line item on your income statement.
Imagine your PP&E for 2022 was £20,000 and £15,000 for 2021. Asset depreciation is estimated at £5,000. The CapEx calculation is:
CapEx: £20,000 - £15,000 + £5,000 = £10,000
CapEx vs. OpEx
CapEx involves upfront investments with longer-term benefits, while operational expenditure (OpEx) reflects ongoing operational costs, such as rent, utilities and office supplies, Monkhouse explains. OpEx items are reported on your income statement and can be deducted from taxes for the year when the expenses are incurred. Whereas CapEx is reported on the balance sheet and these costs are not tax deductible.
"Knowing the difference between CapEx and OpEx enables businesses to evaluate the long-term impact of investments versus operational costs on overall financial health and strategic growth," Monkhouse notes.
Why CapEx matters for your business
CapEx supports budgeting by providing insights into planned investments, helping businesses to allocate funds efficiently and prioritise projects. In this way, monitoring CapEx supports better cash flow management, as it identifies large outflows of cash, enabling businesses to prepare for financial obligations and potential liquidity challenges, says Monkhouse.
Ghai calculates CapEx as part of quarterly financial reviews, to give him full visibility over how money is being spent. “We use the CapEx calculation to manage cash flow, ensuring we have sufficient cash reserves to understand what money is available for other purposes,” he says. Between 3% and 4% of SouceFuse's top-line revenue is now allocated to CapEx every year.
Understanding CapEx also supports long-term planning, by identifying trends in asset maintenance, replacement or expansion, enabling strategic allocation of resources for sustained growth, Monkhouse says.
“Following the pandemic, our employees wanted to work from anywhere” Ghai explains. “Instead of creating our own office spaces, we instead partnered with a managed office service provider." This gives SourceFuse access to 28 locations across India, without having to own and maintain premises.
"We are primarily a software company," says Ghai. "We didn't want to make any large real estate investments. Instead, we want to focus on investing in people and technology. That gets us ahead and makes our business stronger."
1. Once you have enrolled your Card Account, you’ll get up to £75 in statement credits between January and June, and the same between July and December for United Kingdom purchases with Dell Technologies on your Business Platinum Card – up to £150 in statement credits annually. Terms and conditions apply.
2. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
