Capital Expenditure (CapEx) refers to the funds a business uses to acquire, upgrade, or maintain physical assets, such as property, equipment, or technology. These expenditures are long-term investments aimed at improving or extending the life of an asset to support business operations and growth.
For startups, understanding CapEx is essential for financial planning, managing cash flow, and making strategic investment decisions to scale operations.
Types of Capital Expenditure
How is Capital Expenditure calculated?
CapEx can be calculated using the formula:
CapEx = Change in PP&E (Property, Plant & Equipment) + Depreciation Expense
Example: If the PP&E value increased by €30,000 and the annual depreciation is €5,000:
CapEx = 30,000 + 5,000 = €35,000
This means the company spent €35,000 on acquiring or upgrading assets.
How is Capital Expenditure different from Operating Expenditure (OpEx)?
CapEx involves long-term investments in physical or intangible assets that provide value over time, while OpEx refers to short-term expenses required to run daily operations, such as salaries, rent, and utilities.
Why is tracking CapEx important for startups?
Tracking CapEx helps startups manage cash flow, plan for asset maintenance, and allocate resources efficiently for growth. It also ensures transparency when seeking investor funding.
Can software costs be considered Capital Expenditure?
Yes, if the software provides long-term value (e.g., a multi-year license or custom development), it can be categorized as CapEx. However, subscription-based software used for day-to-day operations is typically considered OpEx.
How does CapEx impact a company’s financial statements?
CapEx is recorded as an asset on the balance sheet and depreciated over its useful life. It also impacts cash flow statements under “investing activities” since it represents a cash outflow for acquiring long-term assets.
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