Capital Expenditure (CapEx) in Financial Management

Intro

Capital expenditures (CapEx) are long-term investments in assets  a company expects to use for more than one year, including equipment, buildings, vehicles, and software that drive business growth.

Because CapEx decisions affect cash flow and long-term operating capacity, finance teams typically evaluate both the business case and the controls needed to deliver the project on budget.

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.

CapEx vs. OpEx (Operating Expenditure): what’s the difference?

CapEx and operating expenditure (OpEx) are handled differently because they represent different types of spending. The main difference between Capital Expenditures (CapEx) and Operating Expenses (OpEx) is the lifespan of the purchase and how it is treated for tax and accounting purposes.

• OpEx covers routine costs to run the business (for example, payroll, rent, utilities).
• CapEx is spent to acquire, upgrade, or extend the life of long-term assets used over multiple periods, so it is typically capitalized and recognized over time through depreciation or amortization.

Understanding this distinction is vital for accurate financial reporting and strategic planning. Use the comparison below to understand how each type of spend impacts the financial statements and planning decisions. 

• CapEx represents major, long-term investments, while OpEx covers daily expenses (salaries, rent, utilities, etc.) and short-term investments. 
• CapEx investments cost more than OpEx and must be approached with careful planning, given that the value of a CapEx asset may depreciate. 
• For financial reporting purposes, CapEx investments require more steps than OpEx. 
• A CapEx investment is added as an asset to the balance sheet for the fiscal year in which it was purchased. For each subsequent year of the asset’s useful life, how much the asset has depreciated is listed as an expense on the income statement. CapEx investments are also not tax deductible. 
• OpEx costs are always reported on income statements, are tax deductible, and can be reversed more readily because they are not long-term investments. 

Capital expenditure examples: what counts as CapEx?

Capital expenditure examples typically fall into tangible and intangible assets, and they usually support one of two purposes:

• Maintenance CapEx: spending required to keep existing operations running (replace worn equipment, renew critical systems).
• Growth CapEx: spending that expands capacity, adds locations, enters new markets, or enables new offerings.

In practice, companies document clear capitalization policies so teams classify purchases consistently, then track the asset from acquisition through depreciation and retirement in the fixed assets subledger.

Here are some specific CapEx examples: 

• Tangible Assets: Land, Structures (built or acquired), Equipment, Vehicles, Furniture, Machinery, Hardware 

• Intangible Assets: Software, Patents, Licenses, Trade Secrets, Copyrights, Trademarks 

CapEx Formula in Finance

How to calculate CapEx

Finance teams commonly estimate CapEx using a fixed-asset Property, Plant, and Equipment (PP&E) approach:

​CapEx = ΔPP&E + Current Depreciation 

In this formula:

• Δ PP&E (Change in Property, Plant, and Equipment): The difference between the PP&E at the end of the current period and the PP&E at the beginning of the period.
• Current Depreciation: The total depreciation expense recorded for the current period.

This method helps explain how much was invested in long-term assets during the period, based on balance sheet movement plus depreciation. CapEx can also be calculated using financial statements:

• Balance sheet approach (total CapEx): Net increase in PP&E (prior year to current year) + current-year depreciation
• Cash flow approach (net CapEx): Cash outflow for purchase of fixed assets − cash inflow from sale of fixed assets

Techniques used to assess CapEx decisions

When evaluating CapEx proposals, finance teams often pair the accounting calculation with capital budgeting techniques that estimate whether expected benefits justify the investment. Common methods include net present value (NPV), internal rate of return (IRR), and payback period, supported by scenario and sensitivity analysis to test assumptions (volume, timing, costs, and useful life).

How does CapEx impact financial statements?

Capital expenditures (CapEx) impact financial statements differently than standard expenses. Because CapEx provides value over a long period, the initial cash outlay is not immediately recorded as an expense on the income statement.

Instead, the following occurs:

1. Balance Sheet: The cost is recorded as a non-current asset.
2. Income Statement: The asset’s value is expensed gradually over its useful life through depreciation (for tangible assets) or amortization (for intangible assets).
3. Cash Flow Statement: The initial payment appears as a cash outflow under “Investing Activities.”

Unlike operating expenses (OpEx), CapEx is not tax deductible in the year of purchase, and it requires more complex financial reporting. Understanding and managing CapEx effectively is essential for strategic planning, financial transparency, and demonstrating long-term business growth potential

How can ERP software help manage CapEx?

Effective CapEx management requires connecting budgeting, purchasing, and fixed asset accounting. An Enterprise Resource Planning (ERP SOLUTION) system like Acumatica streamlines these operations, ensuring compliance and reducing the risk of cost overruns.

Cloud-based ERP SOLUTION software empowers finance teams to:

• Automate Approvals: Implement role-based workflows to require approvals for capital requests, maintaining a clear audit trail from request to capitalization.
• Forecast Accurately: Budget CapEx by initiative, separating maintenance from growth projects to monitor planned vs. actual spend in real time.
• Track Asset Lifecycles: Manage in-service dates, depreciation methods, and asset retirements within the Fixed Assets module to mitigate obsolescence risks.

Features such as General Ledger, Fixed Assets, and Cash Management help companies monitor depreciation, manage cash impact, and produce consistent reporting for decision-making.

Shirley Lim, Director of Finance at The Learning Lab, notes that Acumatica provides a strong financial foundation: “Finance has always aimed to account for that one version of truth so having information in Acumatica accessible to the rest of our stakeholders will allow them to work together with Finance to ensure information is properly recognized and accounted for.”

Frequently Asked Questions

Q: Is software considered CapEx or OpEx?
A: Software can be classified as either CapEx or OpEx depending on how it is purchased. Traditionally, purchasing a perpetual software license is treated as CapEx because it is a long-term asset. However, SaaS (Software as a Service) subscriptions are typically treated as OpEx because they are recurring operational costs.

Q: Why is CapEx important for business growth?
A: CapEx is essential for growth because it represents the investment a company makes in its own future efficiency and capacity. Without investing in new equipment, technology, or facilities (Growth CapEx), a business may struggle to scale operations or compete in the market.

Q: Can CapEx be tax-deductible?
A: CapEx is not fully tax-deductible in the year the purchase is made. Instead, the tax benefit is realized over several years through depreciation or amortization deductions, which lower the company’s taxable income over the asset’s useful life.