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234. What is CAPEX? Financial Literacy for Business
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Bankers, investors, stakeholders always want to know about your CAPEX.
CapEx means capital expenditure.
When you buy a capital asset, you are making a capital expenditure.
For example, you spend $1.0 million on a production machine that has a 20 year useful life. That’s an investment over 20 years and therefore you don’t expense the $1.0 million on your income statement the year you pay the money.
Instead, you record that machine, the $1.0 million, on your balance sheet as a Capital Asset and then depreciate it over its useful life. See the Episode on Depreciation and Amortization.
You must have a CAPEX budget in your business plan. That is the re-investment in your business, and it is often over looked. You don’t need to know exactly what you will spend the money on because who knows what technology will bring in the future. But you need a budget.
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