CAPEX is Concept, definition, cost calculation and examples

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

CAPEX is the funds a company uses to purchase capital equipment that is used in the production process or to improve the technical aspects of the plant. In addition, this definition also includes the purchase of new buildings, because they can also be used to profit from a particular enterprise. We will talk about the importance of capital expenditures, their types and calculations in our article.

Definition and interpretation of the concept

So, CAPEX is a company's capital expenditures aimed at upgrading existing assets (real estate, machinery, equipment) or acquiring new ones. Here are some examples that can be attributed to this concept:

• development and creation of a new website for the company;
• replacing or upgrading old equipment;
• construction of a new factory or office building;

At the same time, CAPEX includes all related expenses that will be included in the above categories: salary for programmersand designers, buying building materials, buying new computers for the office, and so on.

What is OPEX?

Let's try to explain what CAPEX and OPEX are in simple words. We have already more or less figured out the first concept, although we will certainly return to this issue in the following sections. But the "nut" refers to the fixed costs that the company is forced to allocate to support the business. This category includes:

• payment for various licenses (if necessary);
• employee salaries;
• payment for website hosting.

Thus, OPEX can be observed in every enterprise that operates, and CAPEX - only in those that strive for continuous development. Of course, if the owner of the company constantly pays wages to his employees and acquires all the necessary licenses, this will also lead to the development of the enterprise, but at a slower pace.

What is CAPEX calculated for?

Thinking about what the CAPEX formula looks like? Then for starters, you should familiarize yourself with what people generally calculate this indicator for. As a rule, most large companies try to reduce the rate of fixed waste and use the saved funds for the development of the enterprise. Quite often, the success of a company depends on a well-formed monetary policy. However, one cannot rely on intuition alone - calculations are needed.

For example, the owner of a firm can reduce the number of workers, thereby reducingpayroll costs, after which the money saved can be used to purchase first-class equipment that will replace two or three workers. Such actions will help not only reduce monthly expenses, but also develop the enterprise, since quite often the equipment works much more productively than a person and releases the finished product much faster.

Capex CAPEX

Translation of the English word CAPEX consists of two words capital and expense - capital expenditures. That is, the abbreviation consists of the first two or three letters of foreign words. Capital expenditures can also be referred to as the company's fixed assets that it uses for development. This includes:

• retraining costs for employees;
• acquisition of new transport;
• hiring specialists.

In general, all expenses that directly or indirectly affect the development of the company. Also, capital costs include loans to other legal entities and the provision of loans, since the money will still be returned after a certain period, and even with interest.

What are operating expenses?

OPEX (Operating Expenses) is a company's operating expenses aimed at maintaining business. Also, some entrepreneurs call such expenses the cost of doing business, which is absolutely true. The most common type of "nuts" is the wages of employees. These costs must be documented.company.

Also, do not forget about the constant need to spend a certain amount of money on advertising, which helps not only to maintain the business at a certain level, but also to develop it. Then why not include this type of expense in CAPEX? This is because payments to an advertising agency are made constantly - and this is the determining factor in belonging to a particular concept.

Acquisition of fixed assets

Initially, any company lacks the means to produce products or services for sale. It is at the first stage of development that the main costs of CAPEX occur. This may include the construction or purchase of a building, the acquisition of all necessary equipment, the expansion of the initial material base of the enterprise, and so on.

Is an investment in fixed assets of an enterprise by a shareholder or a law firm considered a capital investment? Of course, because it allows you to develop the enterprise and get a certain profit from the money invested. The size of the CAPEX investment program depends on the company's policy. For example, many corporations sell securities and then pay investors dividends (stocks) or coupons (bonds).

The importance of constant contributions to the OS

According to the online review, CAPEX needs constant funding, otherwise the company simply will not develop and, at best, will stand in one place, and at worst, it will start to yieldpositions to competing companies. Therefore, the main asset must constantly function and be replenished. To do this, you can attract investors from outside or invest your own funds received from the sale of goods and services of the company. Here is just a basic list of costs that CAPEX may include:

• design and survey work;
• technical re-equipment;
• equipment testing;
• modernization of equipment;
• equipment repair.

Funds for all these actions should be allocated from the main asset and constantly supplemented, since the development of the company depends on it. The most literate and enterprising entrepreneurs understand when it is best to invest in the development of a particular function, when it is better to transfer money from OPEX to CAPEX, and how exactly the company should be managed so that there is always money for development in its budget.

Calculation formula

Now you understand that CAPEX is a very important point for the development of any enterprise. However, it should be understood that the formula for calculating it in most cases is strictly individual, since some companies need more capital funds, while others need operating ones. However, there is still a certain formula that is considered universal and suitable for most companies. To calculate CAPEX, follow the algorithm below.

1. Calculate the company's profit for the month.
2. Subtractfrom it all consumables for this period.
3. Subtract 85% from the resulting number.
4. The remaining amount goes to the development of the company.

Most experts are sure that 15% of net profit is more than enough to develop the enterprise. The figure may seem small initially, but it will increase every month (as the company develops). In a few years, these 15% will not amount to 30-40 thousand rubles, but several million.

What is capital expenditure?

CAPEX is not only the funds spent on the development of the company. This can also include capital costs - funds that do not lead directly to the development of the enterprise, but accompany it. Here is a short list of examples:

• professional advice from specialists;
• costs of business management training;
• employment benefits.

All these points do not directly affect the development of the enterprise, but they still lead to development sooner or later. If you pay cash bonuses to employees, they will be motivated to do a good job. The cost of consulting with a lawyer will pay off when you decide to enter into a cooperation agreement with another firm. But with the costs of various trainings, it is still clearer - the more you know about your field of activity, the better you will be able to manage the company and its resources.

Nuances for investing in CAPEX

A novice entrepreneur should learnunderstand when it is possible to invest company resources in the development of the enterprise, and when it is best to refrain from this. For example, if due to investments in CAPEX you will not be able to pay off some of your monthly expenses, then it is best to refrain from such actions. It is also recommended to consider the following factors:

• current enterprise parameters - in some cases, development may not be appropriate, as it will not be fully implemented (for example, there are not enough employees in the state who could work on new equipment);
• specific parameters of the current asset - an existing asset does not always allow you to start developing an existing enterprise, so development is suspended until new resources are found (for example, the area of \u200b\u200bthe premises does not allow you to purchase equipment, as a result of which you will have to wait for opening new store or factory);
• monetary value - the amount of finance that can be used to promote a business without harming an existing enterprise.

If you take into account all of the above indicators, then investing in the development of the company will bring huge profits. Therefore, learn to evaluate your opportunities and the time when CAPEX will be the most profitable.

Video and conclusion

We hope this article has helped you understand what CAPEX is. In simple words, we tried to bring this information to the reader. If you have any questions about this or just want to know about thisa little more topic, we recommend that you watch a short video in which an experienced entrepreneur talks about what a break-even point is and how to calculate it correctly so that the company always has funds for development.

As you can see, CAPEX is a critical part of growing any business, because without constant funding for capital expenditures, your profits will remain where they are now. If every month you allocate at least 15% of the net profit for the development of the enterprise, then in a few years your company will begin to make a profit several times more than it does now. We wish you good luck in all your endeavors.