Quick Answer
To budget for capital expenditure, identify all planned asset purchases that meet your capitalisation threshold. For each item, document the cost, useful life, depreciation method, and business case. Separate CapEx from OpEx in your budget for correct P&L treatment — the cash outflow hits immediately but the P&L charge spreads over the asset's useful life through depreciation.
Capital expenditure (CapEx) covers purchases of long-term assets with a useful life beyond one year. Common examples include office fit-outs, computer equipment, vehicles, machinery, and capitalised software development costs. Most companies set a capitalisation threshold (e.g., £1,000 or £5,000) below which purchases are expensed as OpEx.
1. Collect requests. Ask department heads to submit CapEx requests as part of the budget process. Each request should include the item, estimated cost, timing, useful life, and business justification.
2. Categorise by type. Group CapEx into categories: growth (new capabilities), maintenance (replacing existing assets), and compliance (regulatory requirements). This helps prioritise when budgets are constrained.
3. Set depreciation parameters. For each item, determine the useful life and depreciation method. UK tax rules use capital allowances rather than accounting depreciation for tax purposes — the Annual Investment Allowance (AIA) provides 100% first-year relief on qualifying plant and machinery up to £1 million.
4. Model cash vs P&L impact. The cash budget shows the full purchase price when paid. The P&L shows depreciation spread over the useful life. Both views are important — cash flow budgeting tells you when money leaves the bank; P&L budgeting shows the ongoing cost.
5. Plan the replacement cycle. Don't just budget for new purchases. Existing assets wear out — laptops every 3-4 years, servers every 5 years, vehicles every 4-5 years. Build a replacement schedule based on your asset register.
The Annual Investment Allowance (AIA) lets businesses deduct the full cost of qualifying plant and machinery (up to £1M) in the year of purchase for tax purposes. For amounts above the AIA, writing down allowances of 18% (main rate) or 6% (special rate) apply. These differ from accounting depreciation, so maintain both calculations.
Implement a tiered approval process: items under £10K approved by department heads, £10K-£50K by the CFO, above £50K by the board. Require a simple business case for material items showing the return on investment.
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FAQ
CapEx is spending on long-term assets (equipment, property, software). It appears on the balance sheet and is depreciated over time. OpEx is spending on day-to-day operations (salaries, rent, utilities). It hits the P&L immediately. The distinction affects both your financial statements and tax treatment.
Compare the total cost of ownership (purchase price + maintenance) vs total lease payments. Consider cash flow impact — leasing preserves cash but may cost more over time. Under IFRS 16, most leases now appear on the balance sheet anyway, reducing the reporting advantage of leasing.
Under IAS 38 and FRS 102, you can capitalise development costs if the project meets specific criteria: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, and ability to measure costs reliably. Research costs are always expensed.
Include the full purchase price as a cash outflow in the period of payment. If you are financing the purchase, show the loan proceeds as a cash inflow and loan repayments as cash outflows in future periods. Keep CapEx separate from operating cash flow.
Yes. Grove FP lets you budget CapEx items with purchase price, timing, useful life, and depreciation method. Depreciation flows automatically into your P&L, and the cash outflow appears in your cash flow forecast — keeping both views consistent.
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