Capital Expenditure vs Working Capital
Capital Expenditure vs Working Capital Capital expenditures are money spent by a company to acquire long-term assets. It is neither for short-term gain nor can be easily translated into cash. These investments are inevitable to ensure the continuing business operations and also for future expansion of the company. Types of Capital Expenditures Typically, capital expenditure refers to the expenses that a company incurred to purchase tangible fixed assets and intangible assets. Additionally, capex can cover the costs for repair and maintenance as well as the acquisitions of new business.
Defining Fixed Assets Fixed assets are non-current assets that the company acquired such as real properties, office equipment like printers, faxes machines, telephones as well as tractors, computers and other production equipment. These items are categorised under company’s PPE account. The PPE account is also called long-term assets account or capital resources account. The fixed assets are subject to depreciation for tax reporting purposes. Therefore, the owners are responsible to employ sound procedures to ensure prompt and accurate reporting of the capital purchases over time.
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Nevertheless, these non-liquid assets cannot be sold directly to customers. Defining Intangible Assets Capex can also be incurred for the intangible investments which include the purchase of intangibles such as licenses, copyrights, patents and computer software. However, under certain circumstances, research and development costs can be capitalized. Net Working Capital Net working capital is current assets minus current liabilities. It is also an indicator for a company’s liquidity as it gives analytical prominence to a company’s financial position, particularly how much money it can generate in the next 12 months.
Current assets include cash receipts from customers, cash and inventories whilst current liabilities include payments to suppliers, staff costs, taxes due and commercial papers, which is a type of debt becoming due within 270 days and other payables, which include the current portion of debt, often secured by a long-term assets. Short-term debts may typically include trade line credits and bank loans. Working Capital vs Capex Working capital is for short-term gain whilst capex spans longer than 12 months, it covers maintenance and depreciation that will be captured in the income statement.
Decisions relating to manage working capital are an indicator of the firm whether it is able to continue its operations and has sufficient cash flow to satisfy both short-term debt and upcoming operating expenses with the measure of cash conversion cycle, return on equity, return on capital and economic value added. Conversely, capex is important in financial ratio measures such as “capex ratio” which determines the proportion between the cash from operations and money used for capital expenditures.
This ratio ultimately shows whether a company earns more from its business operations or spends more to maintain and expand these activities. Working capital management is crucial to avoid growing the business out of cash by needing more working capital to fulfill expansion plan than they can generate in the current state. Company should avoid using cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses.