What Are Capital Expenditures (CapEx) And What It Means For A Company?

Companies have a large impact on the functioning of the economy. Their health is important, so becoming familiar with the relevant concepts is just as important. This article introduces one of many important concepts which is Capital expenditures

Definition

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.

They play two roles:

• they constitute a significant but unstable part of private spending, as a result of which changes in spending affect the level of global demand, and thus, production and employment,
• they lead to the accumulation of capital, thanks to which society increases its potential output, and in the long run it promotes economic growth.

In macroeconomic terms, investment expenditure is everything that increases the existing production potential in a given year, i.e. factories or machines. This should not be confused with the purchase of shares, bonds or investments, which are microeconomic investments.

Many different types of assets can attribute long-term value to a company.

Types of CapEx

• Buildings may be used for office space, manufacturing of goods,ect
• Vehicles may be used to transport goods,
• Computers or servers may be used to support the operational aspects of a company including the logistics,
• Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale.

Capital expenditures vs fixed assets

Investments increase the production potential of the country. This takes place through an increase in the value of fixed capital, i.e. fixed assets, which are affected only by some of the investment expenditures. This is because only the so-called new investments, obtained by subtracting replacement investments from gross value. The measure of replacement investments is depreciation, which reflects the annual value of wear and tear of functioning fixed assets. It informs about the value by which the value of the production potential decreased in a given year as a result of exploitation and related physical wear. This type of distinction, however, is relevant only to fixed assets.

Capital expenditures vs inventories

Most companies maintain a certain level of inventory in order to ensure future, continuous sales. As you know, sales fluctuate, and because companies are not always able to accurately predict their sales, they often find themselves holding more or less inventory than planned. These unplanned fluctuations in inventory (which freeze the company's capital), caused by unforeseen changes in sales, are called unplanned inventory investments

In each period, actual capital expenditure is therefore equal to the sum of planned and unplanned investments in inventory.

CapEx vs. Operating Expenses (OpEx)

The key difference between capital expenditures and operating expenses is that operating expenses recur on a regular and predictable basis, such as in the case of rent, wages, and utility costs. Capital expenses, on the other hand, occur much less frequently and with less regularity.

Capital expenditure should not be confused with operating expenses (OpEx). Operating expenses are shorter-term expenses required to meet the ongoing operational costs of running a business. Unlike capital expenditures, operating expenses can be fully deducted from the company's taxes in the same year in which the expenses occur.

Investment expenditures and Gross Domestic Product

Gross investment expenditure is one of the elements of calculating the national income of the economy. Gross Domestic Product is measured by the value of all final goods and services produced. These include primarily investments made in the country in a given year, regardless of whether they replace goods used to produce that year's production. Net private domestic investment, on the other hand, is only an increase in the stock of investment goods in the country. However, they do not include investments replacing worn-out machinery and equipment. The net value of expenditure, on the other hand, indicates changes in the stock of capital goods in a given country. If the change is positive, the state's potential output as measured by capital resources increases. If it is negative, the production potential measured by capital resources decreases.

Source: Becla A., Czaja S., Grabowska M., "Elementy makroekonomii", Begg D. „Microeconomy”