Necessary Expenses to Keep Your Business Going
Capital expenditures (or CapEx if you are being all in the know) are expenses necessary to keep your business rolling.
Some capital expenditures do not have a clear and quantifiable ROI, but they are still important. This list includes furniture, office equipment, computers, and pens (since all the good pens keep mysteriously disappearing).
When the capital expenditures do not directly add to the revenue line, it is crucial to be savvy. For example, unless you are Don Draper, you probably do not need a plush chaise lounge and a fully stocked bar in your office. You will also want a computer that will last, but do you really need the latest, fanciest gadget?
Other capital expenditures, such as plant equipment, directly result in revenue generation. These types of expenses are easy to justify via ROI, but that does not mean you should rationalize your way into overspending.
Most growing businesses go through an accelerated growth phase, then it slows, then it plateaus. The cycle may or may not be repeated but it is a common pattern. Over the full cycle the need for capital expansion and the ability to fund it internally move, perversely, in opposite directions. At the peak of growth accelerations, a company’s need for space, equipment, etc. is usually the greatest. This is, of course, exactly when they do not have the money to fund it.
This is why it is important to spend money wisely on capital expenditures (well, on anything really). Investing too much in the wrong technology, or not staying current, can be deadly.
Don’t stop here. Be sure to check out some of our other accounting resources.
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