What is capital expenditure (CapEx)?

richard-adams
Richard Adams
16 January 2023

According to Wikipedia, Capital expenditure, sometimes referred to as CapEx or capital expenses, is money spent on acquiring or maintaining fixed assets, such as land, buildings, and high-value equipment. It comprises the purchase price or construction cost, including any other costs directly attributable (e.g., professional services) to bringing the assets to working condition for their intended use.

There are two types of capital assets:

  • Tangible: a physical asset, such as a server
  • Intangible: a non-physical asset, such as a software licence

Capital expenditure is accounted for over the useful life of the asset. Typically, if the asset’s useful life is longer than the current financial year, the cost is capitalised and depreciated over the life of the asset or a fixed period.

What are the main types of capital expenditure?

Types of capital expenditure include:

  • Land and buildings
  • Plant and machinery
  • Motor vehicles
  • Office furniture and fixtures & fittings
  • Computer and office equipment (hardware and software)
  • Patents and licenses
  • Rental equipment

Capital expenditures (CapEx) and operating expenses (OpEx)

Capital expenditures are significant investment purchases whose useful life will extend beyond the current financial year.

In contrast, operating expenses (OpEx) are expenses incurred through the normal daily business operations or ‘cost of sale’ expenses to keep the organisation running, e.g., staff wages and other expenses. For example, the purchase of a new hotel building or a large piece of equipment is a capital expense while heating/electricity and office supplies are an ongoing operational expense.

CapEx planning

CapEx planning is the process of devising an organisation’s capital expenditure budget for a period in accordance with its long-term strategic objectives.

The CapEx budget will outline the planned capital expenditure for the forthcoming year. Capital expenditure proposals are initially screened by the business units/departments that will submit their budget requests to a Board of Directors for the next financial year. The capital expenditure budget requests will be reviewed, edited, and approved.

Organisations will each have their own motivations for initiating CapEx projects, but reasons often include:

  • Analyse existing assets. Which assets are coming to the end of their useful life based on maintenance records and current condition/performance?
  • Review the strategic goals and decide what investment decisions to take to support business growth in the next 3-5 years
  • Establish the capital expenditure budget – many organisations allocate up to 10 per cent of revenue for future capital expenditures; others will add borrowing to their balance sheet

Capital expenditure approval process

The process commences when a business unit requisitions CapEx, usually against an approved budget.

Often, requests for capital expenditure are made on paper or in Excel files, with additional information appended where necessary. It is common for organisations to store information on paper, in spreadsheets, eMails and repositories across multiple divisions and geographies.

This form is used to gather information relating to the expenditure project including:

  • Current situation/background
  • Justifications
  • Request amounts and cashflow
  • Return on investment evaluations
  • Quotes from suppliers

Once completed, the originator signs the capital expenditure request form and routes it around the organisation for multiple approvals.

Despite the manual process, many organisations have a formal capital expenditure policy. The approval is made following pre-agreed limits of authority based on hierarchy/job role, such as any expenditure above £50,000 may require CEO approval. Simple rules, such as seeking approval from the IT Director for all computer-related expenditures, may also exist.

If approved, the capital expense request (and supplementary information) will be signed and dated at each step and stored on a PC, in someone’s inbox or physical filing cabinet.

Unfortunately, without any automation and enforcement of these policies and rules, they can be seen as hard to understand and therefore become de facto optional.

Automating approval with CapEx software

CapEx software facilitates the completion of capital expenditure requests online and creates the workflow to automatically route the forms throughout the organisation for review and approval.

Key benefits of capital expenditure management software include:

  • Improved spend controls by tracking year-on-year spending (budget vs actual) and committed and accrued financials for capital projects
  • Significant cost savings from tighter spending control, eradication of procurement overlap, improved utilisation of existing equipment/capital, and the ability to leverage bulk-buying power
  • Scalable and simple to roll out to other divisions or add new users
  • Standardisation of the capital expenditure process across business units, and geographies
  • Adherence to formal CapEx governance procedures and process compliance
  • Better decision-making with accurate financial data and supporting documents presented to executives online for more informed investment decisions
  • Quicker approvals, automated notifications include a approve/reject link and executives can simply reply to the eMail if they are out of the office
  • Automation will eliminate the need for paper, minimise risk, eliminate errors, and accelerate CapEx approval cycles
  • Increased visibility and traceability of capital projects with real-time visibility of CapEx spending

Conclusion

Efficient management of capital expenditure is important to organisations seeking to deliver corporate strategy, manage cash flow, achieve cost savings, and improve bottom-line performance.

Poor capital expenditure management stagnates growth, yet many companies continue struggling with manual processes leading to delays in capital spending and reduced competitiveness.

Today, more organisations are automating capital expenditure approval processes to manage their capital projects more efficiently.

At ePC, our CapEx system offers near limitless flexibility to meet varied customer-specific requirements for capital expenditure request approval and reporting – without lengthy development cycles.

The platform offers:

CapEx planning

To identify the most attractive projects for capital investment

CapEx budgets

To set up period budgets in the system and to track spending

CapEx approval

To create, submit, and route submissions for approval and monitor progress

CapEx post investment

To evaluate the project and demonstrate return on investment (ROI)

Are you looking to automate CapEx approval processes? You can schedule your CapEx system demonstration or call 03300 100 000 to discuss your requirements.

About us

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