When managing projects, the focus is on their development, including due dates, stakeholders, quality, risks, planning, resources, and more, and sometimes, one essential part is left out: the project finances.
We refer to project finances as those funds allocated for a particular endeavor or project. Four concepts (or costs) must be held accountable within this universe: direct, indirect, OPEX, and CAPEX.
In this post, instead of going through these types of costs (we have already gone through Direct Costs and Indirect Costs), we will stop at CAPEX specifically. CAPEX is part of the enterprise expenses categorized to prepare financial statements. CAPEX represents capital expenditures and involves acquiring assets for long-term use.
In other words, it refers to the costs incurred to acquire tangible assets that will be used over an extended period; these are challenging to allocate.
When preparing financial statements by the end of a month, quarter, or year, it’s necessary to categorize company expenses and present them clearly and concisely so that everyone involved in the project and the C-levels supervising it can understand them.
When to classify an expense as CAPEX?
It’s simple to identify; we’ll calculate an expense as CAPEX when that acquired asset is expected to be used for more than one year and will generate economic benefits during its useful life, especially if it has had a significant cost, e.g., buildings, equipment, enterprise software, etc.
Examples of when to classify an expense as CAPEX:
- Purchasing an office building as a company headquarters. The building is a long-lasting asset that will generate economic benefits for the company during its useful life.
- Purchasing equipment to manufacture products. This equipment is expected to generate economic benefits over a year and the company’s life.
- Investing money in product research and development. This action will report economic benefits for the company.
Why is CAPEX important?
CAPEX is vital for a company’s long-term success and sustainability. Investing in physical assets and infrastructure enhances efficiency, offers a competitive edge, complies with regulations, and supports strategic objectives. CAPEX ensures a company remains robust, adaptable, and poised for growth.
Benefits of CAPEX
CAPEX is crucial for enhancing project capabilities, improving efficiency, reducing long-term costs, and providing competitiveness at the time it supports strategic goals, ensuring compliance, and contributing to the success and sustainability of the project. More specifically, CAPEX benefits the company’s projects by:
- Investing in modern equipment and infrastructure, boosting project efficiency and outcomes.
- It helps to streamline processes, reducing time and errors.
- It allows for lower maintenance costs, improving energy efficiency.
- Enables project scalability and adaptability to market changes.
- Invests in innovation and quality, keeping projects ahead of competitors.
- Ensures projects meet regulatory standards, reducing operational risks.
- It allows proper resource allocation and planning to lead to smoother project execution.
- Adds asset value and supports sustainable project goals.
- Strategic investments lead to significant returns and tax benefits.
- It shows commitment to growth, attracting investors, and boosting employee morale.
As you can see, tracking CAPEX is crucial. If you’re using Jira to run your projects, click here to learn how to track these types of costs (among others) in Jira.
