Keeping your CapEx budget separate from your operating budget makes deducting taxes easier. This is because deductions for capital expenses are made over a number of years as depreciation, while operating expenses are deducted in full in the year you incur them. [3] X Research source CapEx budgets often span longer than a year, which is another good reason to keep them separate from your operating expenses. [4] X Research source For example, you might anticipate building a new factory or warehouse, which could take several years to construct and put into operation. You never want the same bank account connected to your merchant account as everything else, because the merchant can theoretically file a chargeback and take all the money. It’s very responsible for a business owner to have multiple business accounts.
Many of these needs are fairly predictable. For example, if your company relies on desktop computers, you might estimate that those computers need to be replaced every 3 years. Adding up the replacement cost for each computer gives you an idea of how much your company will need to spend on computers every 3 years. Your needs might also be based on your company’s growth. For example, you might need to upgrade equipment when your production doubles. If you have a larger company, work with your department heads to determine your CapEx needs. Because they work with the equipment and technology on a regular basis, they’ll have a better idea of what upgrades and maintenance are needed.
Taking company income into account, set the top end of your spending range at 1. 5 to 2 times the expenses you’ve already found. When setting your maximum spending limit, consider the position of your company and your projections for the future. If you’re optimistic about growth and your sales are trending upward, you might set a higher spending limit than you would if your company was in the midst of a slump in performance.
For example, suppose you know you’ll need to spend $10,000 on new computers in 5 years. If you budget $2,000 a year towards those computers, you’ll have the money when you need to purchase them. Other expenses might be triggered by a specific event. For example, if you know you’ll need to upgrade your production equipment when your sales double, look at the amount of money you’ll need to complete the necessary upgrades and determine when your company will have that money available. This helps you plan your growth strategy and sales goals so that your company doesn’t grow beyond its means.
For example, if the economy is currently booming and your sector is doing well, you might optimistically plan to invest more of the company’s income on capital expenses. However, if a recession is looming 2 years later, you’d want to go back and adjust your CapEx budget accordingly so you could keep your business ahead of the curve.
Make sure you have full financial reports for the same period, since you’ll need entries from other reports to calculate net capital expenditures.
The value of assets decreases over time through depreciation, so don’t be surprised if the amount for the current period is lower than the value for the previous period.
For example, suppose your company’s PP&E is $25,000 for the current period and $27,000 for the previous period. You would have a net increase in PP&E of -$2,000, which you could also express as a net decrease in PP&E of $2,000.
For example, if your company has a net increase in PP&E of -$2,000 and depreciation expenses of $4,000, you would have net capital expenditures of $2,000 (-2,000 + 4,000 = 2,000). Once you’ve calculated your net capital expenditures, compare them to your budget. If your net capital expenditures exceed the maximum spending limit you budgeted, go back and rework your budget accordingly. If your company’s net capital expenditures are greater than the depreciation, this means your company’s assets are growing over time. Conversely, net capital expenditures that are less than the depreciation indicate shrinking assets.
