As a business owner, you have maintenance and operating costs. The rent you pay for your physical space, the salary you pay yourself or your employees, production costs and repairs, and monthly insurance premiums all fall under those categories. You spend the money on a fairly consistent basis, in fairly consistent amounts (even unexpected repairs should be planned for with a maintenance/repair fund). Maintaining your facility and production takes money.
But there is another category that might get overlooked. Capital expenditure refers to any purchase towards future value or benefit. This might include buying stocks or bonds (hoping that they will rise in value), or improvements (but not repairs) to existing assets like property or production machinery. If you spend money to make something better (your portfolio, your rental property, your production warehouse), it’s a capital expenditure for tax purposes. The total amount invested in the improvement is then spread out over the expected life of the asset (it cannot be deducted in the same tax year as it was implemented).
Expenditure Planning to Create Value
If you’re running a small business, you should be investing back in yourself at every opportunity. While you may not have the luxury of planning it all out far in advance (you may not have the required funds), you should be looking at it frequently, and spending money for upgrades and acquisitions whenever possible.
The value should be obvious here. As a new and growing company, you need to be getting bigger and better. Capital expenditure is how you do it. You hire more staff. You purchase better production machinery and systems. You rent or build bigger facilities. You open a second location. You absorb a smaller, competing company. The value comes from the cliche but true belief that “you must spend money to make money”.
A larger, established company needs to engage in expenditure planning. Most companies release an annual report - for stockholders and the general public - that states planned capital expenditures for the coming year. Why? Planned improvements add value.
Staying One Step Ahead
On the one hand, many believe that if a company isn’t growing, it’s dying. And while a statement like that is definitely open to debate, the best companies have plans in place for steady and frequent improvements to everything under their umbrella in order to stay at the top. Every industry is open to innovation and tweaks that can revolutionise (or at least heighten) production, product, and market. Expenditure planning allows you to stay one step ahead of your competition. Being “good” or “near the top” should never be good enough. Plan to spend money to not only maintain your current position, but to exceed and rise above it. Doing so often makes it a reality. Don’t rest on your laurels. Your competitive edge (or lack thereof) is the very real difference between success and failure.
Public Opinion and Reputation
Shareholders and potential shareholders want to see that a company has vision. Expenditure planning - and the annual or semi-annual report about it - shows exactly how, why, and what a company is doing to keep its edge. Companies that show innovation, knowledge, courage, and foresight in that planning attract new investors and keep their current ones. And that adds value in the most literal sense of the word.
Keeping Abreast of Industry Trends
Good expenditure planning needs steady monitoring. Even though a company may only formally sit down and plan once or twice a year (although feel free to do so more frequently), there should be constant monitoring of the plan and its implementation. Is the expenditure working out the way that was expected? Is it adding sufficient value to justify its expense? If yes, then consider adding to it. If not, then the planned expenditures connected to it should be scrapped, altered, or reassigned. This monitoring has the added bonus of getting insight into your industry trends and competition. What are they doing? How are they improving on a regular basis? Is the new production process utilised by others really the best choice?
Of course, you should be doing this kind of monitoring anyway, but by tying it to expenditure planning and implementation, you’re very effectively killing two birds with one stone.
Spending Money Makes Money
Last but certainly not least, expenditure planning is necessary to your budget. Buying a bigger production facility means more money, yes, but it always means more production. Increasing your delivery vehicle fleet means more and faster deliveries. More equipment means more efficiency. New departments within your company (R&D, Testing, and so forth) means more input, more innovation, more control over your future.
Capital expenditures must be part of your annual budget...and not just in a vague, if-something-breaks-down-we’ll-fix-it kind of way. Maintaining and repairing your existing facilities and equipment is not the same thing. That’s not growth. Clearly planning and seeing where you’re going to spend your money this year allows everyone - shareholders, employees, the general public - to see just how visionary you and your company can be. It gives a clear set of goals and expectations to work towards, and it provides a roadmap for claiming the top spot in your industry or niche.
Photo by Ken Teegardin
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