How to create a capital expenditure budget

Written by james collins
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How to create a capital expenditure budget
Spending on new factory equipment is an example of capital expenditure. (Getty Creative)

Capex or capital expenditures are the long-term assets a business invests in to make a profit. Most new companies have large capital budgets for new equipment or property due to the nature of start-ups and the need to purchase original assets for the company. As the company matures, so will its needs for heavy capital expenditures. High-tech companies that benefit from software applications may also continue to increase capital budgets, especially if the applications can create leaner and more efficient organisations.

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  1. 1

    Determine the capital needs of the organisation. Some organisations do not need to purchase capital every year whereas others must constantly invest in new capital in order to stay competitive.

  2. 2

    Identify the maintenance capex expenditures. Maintenance capex is any capital expenditure that is used to maintain the capital invested in earlier years. This includes updates priced into procurement contracts as well as regular upkeep. These costs may be estimated for you in the warranty or instruction manual. If not, ask the seller for an estimate.

  3. 3

    Identify new capital expenditures for the company. New capital expenditures help a company make additional revenue. They may also help to cut costs through increased productivity.

  4. 4

    Request input from department heads on departmental needs. Be sure to align capital spending with production forecasts.

  5. 5

    Add the maintenance capex expenditures and new capex expenditures to determine a total capex budget. Be sure to include specific increases or decreases in the capital budget that represent over 10 per cent of the budget.

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