Finances

Capital projects are usually some of the most expensive undertaken by a company. And, unless you have a nearly unlimited budget to work with, you must determine how to use capital funds wisely. This is where your accountant will become a real asset during the planning and budget process. 

If you plan to replace or update an existing asset, such as an office building, first determine the financial value of the asset in hand. In accounting terms, find out what its remaining 'useful life' is. Has it been fully depreciated, resulting in no further deductions against income? If it is disposed of, how much value will it have and can that be added to the budget for a replacement? 

Next, you will need to determine the actual cost of the new project. Seek out reliable and appropriate estimates from legitimate sources. In the case of a single large asset, like a piece of equipment, this may be as simple as getting a market value. The design and construction of an office building will be harder to estimate, and you may have to rely on a range of costs.

The third major component of capital budgeting is the return on your investment. A growing construction company, for example, that spends a lot of money on hired cranes may feel that investing in their own hydraulic cranes will increase profit or allow larger jobs. Work with your accountant to determine how much increased income you may get and how the asset will affect future expenses. 

Risk

Consider the financial or strategic risk if you don't complete the project. If you put off repairs to your plant's plumbing system, could a serious rupture cost more to fix and replace? Could it close operations? If so, what is your output or income each day you'd be closed? And how big is the risk that something will actually occur? Will you lose out on tax credits, local improvement grants, or other financial assistance?

There may also be opportunity loss if you do choose to buy a capital asset. An opportunity loss is when you will miss an opportunity by investing the money elsewhere. If you replace the plumbing system and stop future ruptures, that's still money you can't spend on an updated manufacturing process, a piece of heavy equipment, or an investment in new intellectual property. Is the investment you’re considering more important than other choices? 

Goals

Finally, remember that capital expenditures are long-term assets. They should, therefore, fit into the company's long-term plans. A business that wants to expand its products may need a new building to house the coming growth. If you expect to move to a new location in the next five to ten years, though, would it be better to put your capital budget into fixing the old pipe system so that you can get more money when you sell? 

Not all strategic investment choices are about practicalities. How would the new asset fit into your company's image, marketing, brand building, or reputation? How will it affect your workforce? Are employees trained to operate the new asset, or if not, are they willing to learn? And how will your customers view your investment? 

Certainly, creating a plan for capital expenses is a complicated subject. At Bliss & Skeen CPAs, we can help. We provide assistance with all steps in capital budgeting — from cost research and bookkeeping to analyzing both company and project budgets — so you can make the best decisions with your money. Call today to make an appointment.