Capital expenditure or CAPEX is the funds businesses use to buy, upgrade, and extend an asset’s lifespan. In essence, they’re long-term investments that can enhance a company’s operational efficiency, increase revenue, or improve existing assets.
Although these expenditures can be very beneficial to your business, they typically require a significant outlay of money. That’s why whether you run a law or accounting firm, you need to budget your capital allowance and investments efficiently to generate the revenue required to cover the costs of your capital expenditure.
To help you get off to a good start, here’s why you should consider computers and software as capital expenditures — plus others you can also use as an asset for your company.
Computer Equipment and Software
Advancements in technology are helping businesses to keep track of their physical assets, placing them to more efficient use. Plus, technologies can streamline operations, making computer equipment and software excellent capital expenditures. For computer hardware, equipment such as laptops, desktop computers, servers, and peripherals can be capital expenditures. Meanwhile, for software expenditures, this can vary. For instance, you can consider computer software as a long-term asset if it falls under fixed assets like structures and properties.
However, there are instances when your software isn’t considered a long-term asset. For example, if it’s a component of a weapon’s system, it won’t get capitalized. In contrast, the software utilized to accumulate the costs of getting that weapon systems or management for that item would qualify to be a capital expenditure.
Buildings and Property
Buying or upgrading to a building or land is considered a capital purchase, which, in turn, is a capital expenditure. That’s because the asset has a useful purpose and can serve a company for years. If you plan on buying properties, plants, or buildings, they often get facilitated using secured debt or mortgage, where you’ll need to pay it over many years. Additionally, interest rates linked with your debt will also gradually depreciate as the asset’s worth declines over the years.
Machinery used to manufacture goods becomes obsolete or wears out over time, meaning you’ll need upgrades often to replace them. If the costs for these are higher than the capitalization limit in place, the values should depreciate in the long run — which you can finance by making them capital expenditures.
A vehicle or a fleet used to distribute or carry out services for consumers can be considered capital expenditures. If you run a delivery company or catering company, investing in one can be a great idea. But keep in mind that the costs associated with leasing these vehicles aren’t considered capital expenditures. Instead, they’re regarded as operational expenses.
Capital expenditure is the funds used to purchase, improve, and extend the lifespan of an asset, proving to benefit an organization for one year or more — and those mentioned are just some of the examples of the assets that you should invest on. But thanks to their high costs, irreversibility, and lasting effects making capital expenditure decisions is crucial to the company, so carefully plan, budget, and execute it for lasting success.