The market for used capital equipment is generally very poor. Most forms of capital equipment are customized to meet specific company requirements and needs. IrreversibilityĬapital expenditures are often difficult to reverse without the company incurring losses.
The long-term strategic goals, as well as the budgeting process of a company, need to be in place before authorization of capital expenditures.
#CAPITAL EXPENSES DRIVER#
Similarly, the current decisions on capital expenditure will have a major influence on the future activities of the company.Ĭapital investment decisions are a driver of the direction of the organization. The range of current production or manufacturing activities is mainly a result of past capital expenditures. The effect of capital expenditure decisions usually extends into the future. They are important because of the following reasons: 1. Importance of Capital Expendituresĭecisions on how much to invest in capital expenditures can often be extremely vital decisions made by an organization. It is important to note that funds spent on repair or in conducting continuing, normal maintenance on assets is not considered capital expenditure and should be expensed on the income statement whenever it is incurred as repair and maintenance expense. Both intangible and tangible capital expenditures are usually considered assets since they can be sold when there is a need. A capital expense can either be tangible, such as a machine, or intangible, such as a patent. There are normally two forms of capital expenditures: (1) expenses to maintain levels of operation present within the company and (2) expenses that will enable an increase in future growth.
Many companies usually try to maintain the levels of their historical capital expenditure to show investors that the managers of the company are continuing to invest in the growth of the business. Therefore, making wise CapEx decisions is of critical importance to the financial health of a company. Capital expenditures normally have a substantial effect on the short-term and long-term financial standing of an organization. The expenditure amounts for an accounting period are disclosed in the cash flow statement. Long-term assets are usually physical, fixed and non-consumable assets such as property, equipment, or infrastructure, and that have a useful life of more than one accounting period.Īlso known as CapEx or capital expenses, capital expenditures include the purchase of items such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software, or intangible assets such as a patent or license. Capital expenditures refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company.
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