Capital Expenditure for a Business Plan
Capital expenditure or Capex for short, is the amount spent on long term assets during the accounting period.
Long term assets are assets which have a long useful life (normally greater than one year) and are for use within the business and not held for resale. The assets include for example land, buildings, equipment, and plant and machinery, needed to get the new business up and running, ready to start producing and selling goods and services.
For example, a business opening a retail outlet might need to refurbish the premises to make it suitable as a shop, it will then need to purchase display fixtures and fittings and perhaps a till to open for trade. These items would be classified as capital expenditure.
When capital expenditure budgeting, keep in mind, that it needs to support the rest of the financial projection. For example, if the plan is to expand and take on new staff, the capital expenditure will need to reflect this with the purchase of additional furniture, and computers, and perhaps even new premises. Likewise if the plan is to increase production, new facilities and machinery might be needed to allow for the growth.
Capital Expenditure in the Financial Projection
Having estimated capital expenditure, it needs to be included in the financial projections template.
Capex is included in the cash flow statement of the financial projections under the heading cash flows from investing activities. The amount is shown as a negative figure as it represents cash flowing out of the business to pay for the items. For example, if in year one the plan is to purchase machinery worth 5,000, the figure of -5,000 should be included in the cash flow statement on the amount paid for long-term assets line.
Long term assets are depreciated over time, and the remaining net book value after depreciation is included in the balance sheet of the financial projections under the heading of long term assets.
Care should be taken not to include any capital expenditure already included as part of startup assets, as this would result in double counting.
Capex forecasting is an art not a science, no one expects you to be able to predict the future, you are making educated guesses based on the information you have available to give a realistic estimate of what you think the capital expenditure will be. Make sure that the capex is in line with the rest of your plan, and avoid too much detail in analyzing the types of capital expenditure you might have.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to estimate the new debt finance needed to help fund the business.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.