Business people must be familiar with the term capital expenditure, or commonly abbreviated as CapEx. Capital expenditure is one of the important aspects of running a business in order to generate profits that meet expectations. In running a business and a company, we must have a calculation of capital and expenses. To do this calculation, we can do it in two ways, the first is Capital Expenditure (CapEx), the second is Operating Expenses (OpEx). On this occasion, we will thoroughly review everything related to CapEx, starting from the definition and definition, examples and how to use it.

What Is Capex (Capital Expenditure)?

Literally, capital expenditure is the cost of a company's expenses that are used to buy, run, maintain and repair the company's assets. The maintenance of owned assets is very important, such as vehicles, buildings, and equipment related to the running of a business from the company. Capital expenditure can also be interpreted as the initial cost of capital. When running a business or company, we must have initial capital. In the early days of running a business, we take into account the capital for the running of a business over a period of time. Not only in the early days of business travel, companies or businesses also usually have CapEx after the company has been running for a few years. This usually happens when the company gets a big project that can provide high profits. Therefore, the costs needed for CapEx are not small, in addition to being related to company profits, CapEx will also have an impact on increasing consumer satisfaction. Calculating CapEx requires the right capital expenditure formula. Therefore, here are some types and examples of capital expenditure as an illustration for those of us who are still new and just starting a company and need more education related to CapEx.

Definition of Capital Expenditure According to Experts

Capital expenditure is:
  1. Expenses incurred to obtain benefits for more than one accounting period (Mulyadi, 2005:16)
  2. Expenditures that increase the capacity or efficiency of assets or that extend the useful life (Horngren et al, 2006:467)
  3. Capital expenditure is the costs incurred in order to acquire fixed assets, increase operational efficiency and productive capacity of fixed assets, and extend the useful life of fixed assets. These costs are usually incurred in a large amount (material), but they do not occur often (Hery, 2016:270)
  4. Expenses made by companies with the expectation that these expenses will provide benefits or results for a period of more than a year (Syamsuddin, 2011:410)
  5. Budget expenditure for the acquisition of fixed assets and other assets that benefit more than one accounting period (Halim, 2008: 101)
  6. Expenditures made in the context of capital formation that increase fixed assets / inventory that provide benefits for more than one accounting period, including expenses for maintenance costs that maintain or increase the useful life, as well as improve the capacity and quality of assets (Government Accounting Standards)

Difference Between Capital Expenditure & Revenue Expenditure

Unlike OpEx or also called revenue expenditure, CapEx is a cost incurred by a company for long-term needs related to the company. Meanwhile, OpEx (Operating Expenses) is an expense incurred for the company's operational needs, as defined by operating expenses. Needs around electricity costs, fuel costs, employee costs and building costs are included in OpEx. Briefly, the explanation of the difference between capital expenditure and revenue expenditure is as follows:
  1. Capital expenditure provides economic benefits in the future, while revenue expenditure during the current period of expenditure activities.
  2. Capital expenditure is considered as a fixed asset in the balance sheet, while revenue expenditure is a burden on the profit/loss statement.
  3. The economic benefits of capital expenditure are more than one book year, while revenue expenditure is not more than one book year.
  4. Capital Expenditure material value tends to be large or quite material, while revenue expenditure material value tends to be small.

Examples of Capital Expenditure

Here are some examples of capital expenditure. Knowing examples of capital expenditure is important, so that we can better know the ins and outs related to CapEx for the sake of running the business we run. Information related to capital expenditure examples is summarized from various reliable sources, examples of capital expenditure are:

Equipment replacement

The first example is equipment replacement, this type of CapEx is carried out with the aim of increasing the company's assets due to the impetus for the new needs of the company, and some of the old company's assets are no longer functional. This type of CapEx is carried out to update the company to answer all new needs, whether from the market or from the consumers themselves. However, there is also one condition that requires the company to close its stores in order to maintain the company in the midst of difficulties. As we can see from various companies during the current Covid-19 pandemic, many have to go out of business, terminate employment contracts with employees, and terminate non-committed capital expenditure contracts. Non-committed capital expenditure is an agreement related to CapEx made by the company to parties who are considered capable of taking care of CapEx issues.

Expansion to meet growth in exiting products

This type of CapEx is an expansion to achieve growth in the company's products that exist in consumers. Therefore, the purpose of this CapEx is to expand the company which is reviewed from several aspects. The most important aspect of the review is in terms of the cost efficiency of the company's expenses to get high company growth so as to generate large income in the new market environment.

Expansion generated by new products

Every company has a product that is a mainstay. However, no company is enough with a single product issued. In order to win the hearts of consumers, the company must make various innovations to be able to survive and grow. One of them is by issuing new products. When a company releases a new product, it needs to be calculated related to it. This type of CapEx is needed to issue new products. These types of capital expenditure can produce a calculation of the costs needed for a company when it is about to launch a new product.

Projected mandated by law

In every company, there is always money that comes in as income and costs that come out as the needs of the company. This is included in the capital expenditure formula. Companies need a CapEx calculation model, which is in accordance with applicable law. Therefore, this type of CapEx is needed. Especially in companies engaged in the mining sector, which are closely related to state laws and regulations. Because it is related to the hazardous waste produced, how to handle it so as not to harm the community and so on. In CapEx, the term revenue expenditure is also known, which is a profitable expense in an accounting period which is also known as income expenditure. Capital expenditure and revenue expenditure are two different things, but they both talk about the expense of a company.

Capital Expenditure Formula

As far as the explanation above, we can draw the conclusion that the purpose of capital expenditure is to smooth the company's operational process, especially in the long term. To perform CapEx calculations, of course, you need a formula or formula. We can't just do calculations. An example of a CapEx form or formula to be able to calculate CapEx is: Capital Investment Ratio = Capital Expenditure Annual : Total Company Assets Capital expenditure Annual is the cash flow in investment activities in each accounting period. By dividing the annual capital expenditure and total company assets, we can get the capital investment ratio figure. Meanwhile, we can get the annual capital expenditure and total assets of the company in the financial statements issued by the company periodically every year.  With the information on total assets and capital expenditure in the financial statements, we can implement the formula above and get the calculation of the CapEx needed by the company. That way, the company's draft financial budget, especially related to expenses, can be calculated properly for the sustainability of the company itself. Not only does it facilitate the company's operational process in a certain period, CapEx also has several good benefits for the company, for the sustainability of the company itself.

Benefits of Calculating Capital Expenditure

Companies must make various important decisions, so that the company can run smoothly and can also get profits in accordance with expectations. To achieve this, CapEx is one way that can be done. Because CapEx has several benefits that can be useful in the long run.

Long-term effects for the company

The first benefit of CapEx is that it can have a good impact in the future for the company itself. Calculations related to the company's production costs carried out in the next few years can have a great influence on the running of the company every year. This can also affect companies that will make capital investments. Capital investment has a great impact on the company. Operational costs are an important consideration for companies to make capital investments or receive investment funds.

Future company investments

It is undeniable that to be able to do CapEx a company requires a huge cost. Because CapEx calculates in detail related to the company's expenses. Be it the use of assets, maintenance and so on. However, it is an investment that the company spends on a bright future for the company. CapEx calculations can prevent companies from making decisions that are detrimental to the company, because every CapEx calculation that is done is very detailed and takes into account many things.

Initial cost expenditure

Never assume that the initial cost is a large cost. Because, to be able to run a company, it needs a large amount of funds to generate even greater income. CapEx calculations can measure the initial costs incurred with a predicted income for the company itself. The calculation is a very specific result, although many other influential external factors cannot be predicted either. But at least, the company has done calculations and measured clearly using CapEx.

Preventing depreciation

Depreciation is the depreciation cost of a company. In order for a company to prevent depreciation, detailed and accurate calculations are needed, which can be done using CapEx. Because, CapEx can provide an increase in the company's assets. When a company's assets begin to be used, asset depreciation begins. CapEx can also calculate asset usage so that depreciation can be prevented.

Difficulties in Calculating Capital Expenditure

To be able to feel the benefits of CapEx that has been described above, of course we have to do CapEx as best as possible. Doing CapeEx calculations cannot be done easily. There are many obstacles and difficulties that we will face. Some of the things below are the difficulties that will be faced, as an illustration for us to prepare in doing the CapEx calculation:

Measurement issues

Because CapEx is a detailed calculation of operational costs in the long term, the first obstacle or difficulty that will be encountered is around measuring or estimating costs. There are several aspects that may be overlooked or have an immeasurable effect, but this is natural in the calculation of CapEx.

Uncertainty experienced

Some aspects that are not measurable or unpredictable are natural, because in running a company there are many uncertainties experienced. Because basically doing the CapEx calculation will always be marked by uncertainty, even if we do the calculation effort for the long term of the company. No matter how good the long-term calculations are, errors and discrepancies will inevitably occur.

Spread temporal

The benefits and costs related to CapEx will be extended, for a considerable period of time related to the company's industrial or infrastructure projects. This is known as the Temporal Spread. In its implementation, Temporal Spreads will bring problems, especially in cost estimation and implementation.

Tips for calculating CapEx efficiently

However, some of the above related to the difficulties faced do not loudly reduce the benefits of CapEx itself. In order for CapEx to be used effectively, here are some tips that can be done to calculate CapEx efficiently. The goal is of course to be able to get a good CapEx calculation:

Create a clear company structure before starting

Get used to starting everything by creating a company structure, especially when the company is about to start a new industrial project or release a new product. Thinking about the scope of the project, the time of project implementation and all preparations such as labor, materials, money and services must be thought out in a structured manner, in order to be able to carry out efficient CapEx calculations.

Have a long-term mindset

When calculating CapEx, whether for the company as a whole or for a new industrial project to be worked on, it is mandatory to use a long-term mindset. That is, think of everything for long-term needs. Because basically the calculation of CapEx is intended for operational costs that are continuous for a long time. That way, we can calculate that we have to buy assets, set aside funds for asset maintenance purposes, recruit new workers and so on.

Manage data accurately

CapEx calculations are carried out to be able to take into account the amount of costs that the company needs in the future, to be able to produce accurate calculations, of course, accurate data is also needed. In order to get efficient CapEx calculations, we must start producing detailed and accurate reports, as part of good data management, which will be useful for performing CapEx calculations in the future.

Optimize company details

Never forget the details when making financial statements. Because, with less than optimal details, the company's financial statements will look vague, and the information produced will be less accurate. This can have a detrimental impact in creating an efficient CapEx. In financial reporting, between details and accurate information is necessary for the balance of the company. Especially in data and information management.

Create clear company policies

The company that makes CapEx is undoubtedly a large company that involves many people in it. Such as the large number of employees, the number of departments or divisions of the company, and the number of company assets that are also very large. Therefore, to create a good work system, clear company policies also need to be implemented. Corporate policy will also have a significant impact on the calculation of CapEx, although as we already know that CapEx is a calculation for the company's costs in the future, it is also very related to the company's policy. If the company's policy is not clear, the resulting CapEx calculation will not be optimal and efficient. Clear policies that can be followed by all parties in the company in order to make a clear cost budget and according to the predetermined flow and path.

Conclusion

Based on the explanation above, we can get one thing that is clear that CapEx has a very important role for the running of a company. Especially for companies that have the desire to succeed and grow. Capital expenditure is one of the important tools to achieve this. Although there will also be various difficulties and obstacles in calculating CapEx, this must be overcome in order to produce a company that has clear and measurable profits. A good company is one that makes huge profits, and always manages to get out of every difficult position with a solution that suits the company itself. In addition to the explanation of the Capital expenditure problem above, you can read other articles such as the explanation of capital gains in the GIC Journal. Don't miss out on getting additional bonuses from the GIC affiliate program, as well as participating in live trading that GIC has provided to train you in forex trading at NFP Live Trading