Today large amount of finance is tied down as capital expenditure in business enterprises. The percentage of capital expenditure is huge in utility industries like oil and gas for valid reasons. Elsewhere in service industry and small business enterprises there is a rising trend in capital expenditure without justification. Let me give you do and don’t on how to control capital expenditure in business:
What is Capital Expenditure?
Before charting a road map of do and don’t in capital expenditure, let us first find out what exactly fits the term capital expenditure which is often shortened as Capex. Any purchase & improvement of land, purchase & construction of buildings, purchase and installation of plant & machinery, tools & equipments, furniture & fittings come under the definition of Capex. These assets are classified as fixed assets in finance. After the initial phase of acquisition, fixed assets are to be maintained; this results in revenue expenditure. When it is necessary fixed assets are to be overhauled; this results in Capex once again. There are similar words used in business meaning overhaul: improvements, upgrades, refurbishing, extension, and face-lift are some of the most common.
Do List
1. Undertake Capex where the useful and economic life of the underlying fixed assets can be extended. Assume you have a plant and it is almost worn-out; if you can extend its usefulness might as well spend money to do so rather than buying a new one
2. When you experience rise in your scale of business operations you should sanction relevant Capex
3. If there is an industry wide use of a particular fixed asset that you do not possess then it is better you approve Capex. A good example is the acquisition of state-of-art technology in media and communication
4. When your competitor acquires a specific asset that can tip the scale in his favour in terms of sales and operations then it is advisable you do Capex urgently
5. If you have a drawn-out Capex plan to be rolled over a number of years, you must undertake relevant expenditure even though such Capex is not urgent. A good example is re-furbishing done in tourist hotels and cabanas. Often this type of expenditure is known as planned capital expenditure
6. Replacement of fixed assets could also be necessitated by events where the business has no control. An example is loss of fixed assets caused by fire, theft or natural disaster
7. Go for Capex where the assets you intend to acquire would generate cosmic energy which in turn can be translated into enhancement of business image, improvement of staff morale and finally growth in business prospects. This we call cosmics. As you are aware cosmics are present in everything you do including your business
Don’t List
1. Never approve Capex where you are adding fixed assets that cannot be used in near future; this superfluous acquisition can be seen in many businesses that fail within a short period of their opening
2. Any wasteful Capex must be avoided absolutely. Most small business enterprises get into this situation because they do not evaluate the purchase decision carefully. More than that they do not plan out the purchase of fixed assets in advance
3. Never acquire un-productive assets; once again this is one of the main causes in failure of small business. An ostensible example is the construction of parapet wall and other security paraphernalia that are not meant to aid in production and operations
4. Do not be overly carried away by value of aesthetics in business; it is acceptable that you should beautify your environ in the business place. But always look at the trade-off between utility and aesthetics
5. No Capex if that only serves only your ego. Grandstanding is good in politics but never in business. If you are egoistic, you will squander your finance, let go of your business opportunities and finally compromise your future.
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