Capital expenditure budget

Capital expenditure (capex) refers to the money spent to acquire the physical assets of a business. The role of a capex budget is to take account of all expenditures that are required to replace worn-out or depleted assets and to acquire additional fixed assets. As a commitment to fixed assets can involve significant cash flow, having a capex budget also allows you to subsequently build these outflows into your business’ overall cash flow statement.

Requests for capex

To complete our Capital Expenditure Budget request input from all department heads on capex spending requirements, phasing this expenditure over the company’s year where possible. Advise them that they need to rate the need for the spending and the relative payoff of the request - all of which will have to go through the usual authorisation process. Record the status of a capex’s authorisation, e.g. requested/to be agreed/authorised/in process, on the Capital Expenditure Budget.

Required capex arises from three main requirements: (1) the need to replace equipment which is failing to perform as required; (2) the capital element of new projects approved by the board, and (3) needs or alleged needs which were not foreseen at the time of the budget process.

The simplest solution to “unforeseen” needs is to have a contingency in the capex budget for unexpected requirements, which only you and the board know about. If you reveal the existence of a contingency in one year, budget holders will expect it in future years.

It is also useful to be able to identify each type of capex. On the capital expenditure budget we’ve inserted a couple of columns to be used for identifying the types. The letters we have used to populate these columns are: N=new, 2=second hand, S=self-build, V=vehicles, E=equipment, S=IT systems, B= buildings and C=contingency. At the end of the report we have also reanalysed total expenditure by type of capex so the board can see where the spend will eventually appear in the balance sheet of the business.

Three sections

Your capital expenditure budget should also be devided into the following sections:

• items remaining (brought forward) from the previous year’s budget (unless they are no longer necessary)
• items for the current year
• items to be continued into the forthcoming year (if part of an extensive capex project).

Use your budget from last year to help identify any items that have been authorised but still not executed/completed.