Capital expenditures (CapEx) are long-term investments in assets like equipment, buildings, or software that drive business growth.
This article explains what CapEx is, how it’s calculated, and why it matters in financial planning.
You’ll learn the CapEx formula, see real-world examples, and discover how ERP systems help manage CapEx more effectively—especially in industries like construction and manufacturing.
Understanding Capital Expenditures (CapEx)
Capital expenditures (CapEx) are core to operating and growing a business. Accurate visibility into these funds is essential to decision-making and long-term planning. Businesses use CapEx to acquire, upgrade, and maintain assets in the long term. These assets can be physical (i.e., tangible, like buildings and equipment) or non-physical (i.e., intangible, like patents and licenses), but they all reflect a company’s investment in its future growth and efficacy—something financial analysts and investors want to see.
Today, we’ll examine these concepts more closely, so businesses, of any size and in any industry, can see how CapEx can impact their future success.
CapEx vs. OpEx
CapEx differs from another common type of business expenditure, operating expenses (OpEx), in several ways.
CapEx vs. OpEx Comparison
Aspect | CapEx (Capital Expenditures) | OpEx (Operating Expenses) |
---|---|---|
Nature of Investment | Major, long-term investments | Daily expenses and short-term investments |
Examples | Equipment, buildings, vehicles | Salaries, rent, utilities |
Cost | Typically higher; requires careful planning | Generally lower; more flexible |
Financial Reporting | Creates an asset on the balance sheet. The whole expense is not recorded immediately; instead, the cost is spread (depreciated or amortized) over the asset’s useful life | Hits the income statement immediately. These costs are fully expensed in the period they’re incurred |
Tax Treatment | Only the depreciation or amortization expense is tax-deductible (for the period in which it is recognized). The initial cash outlay associated with the CapEx is not tax-deductible | Tax deductible in the period in which it is incurred |