When viewing a company budget, the controller, or whoever is the financial in-charge person or committee, they must look into the future. As we know, technology advances and hardware ages. A copy machine is going too last only so long before it needs to be replaced. The same can be said about significant equipment or specialized equipment that may need to be designed, redesigned, and built for some future project, assembly line, or application.
As a company grows, the need for capital expenditures grows right along with it. Many manufacturers, after a few years of good growth, usually will outgrow their current facilities. This is another reason why planning is so important. As growth begins and starts to advance, financial personnel have to keep this in mind and put into place plans for the future. Depending on management overall, this may change the budget allocation to move more funds toward the appropriation of future quarters.
There is always the other possibility or happenstance whereby the industry due to innovation in equipment or application, now needs a smaller facility. These days with all the advances, it is possible that this can and will be the case. Savings on capex can also be likely.
A good look into the future will help in the forecasting of needed capital equipment and or real estate. Realistically you have to consider items such as inflation or deflation, trends in the commercial real estate market, the cost of leasing versus the cost of building, or purchasing outright.
Planning is always key to the expansion of any company. Part and parcel of such a plan are capital expenditures. As in the allocation of reserves, capital expenses must also be set aside. Neither fund reserves nor expenditures are the same things. These are entirely two different line items and should be given separate thoughts on their allocations.
A good example is the office equipment. Computer hardware that sits on a desktop may last about five, maybe six years, without too much nursing. Yet, every year more efficient device is released. Depending on the savvy of the purchasing agent, life can be extended through the original purchase. If one buys a computer that has scalability, then one can prolong the life of the hardware if it doesn’t, then it will be costly to replace the equipment for the advanced feature.
Some manufacturers or laboratories may set aside or allocate for future research and development expenses. This may happen due to new ways of thinking or new innovations from other companies that would also need further development. Yet, it is noteworthy that the originator of the research project would also have capital interest to attract outside investment.
In summary, we have seen that by having a proper future scope, savvy purchasing, integrating these with budget considerations can bring about a better and improved future for any company that utilizes these concepts within their planning for capex.