Capital Expenditure

Capital Expenditure

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Capital expenditure by the government or, by the banks is used to maintain, acquire or upgrade physical assets like buildings, equipment, heavy machinery, vehicles, property, factory, technology, etc. This type of expenditure is normally used to undertake new investments or projects to increase the scope of future operations or to enhance the economic benefits of the stakeholders. It is a type of investment that companies and governments resort to for improving the deliverables to customers or for providing more facilities to citizens over a period. The cost of the expenditure is spread over the useful life of an asset and the amount depends on the type of work planned.

Another name for a capital expenditure is Capex and it helps in creating long-term assets for a company or government. Capex figures help in revealing how much a corporation or government is investing in new or existing fixed assets to augment or maintain its capacity. Capex is an investment and therefore it reflects itself on the balance sheet instead of the income statement. Here, it must be highlighted that acquisitions and patents are also types of Capex because acquiring an entity adds to the value and creates a long-term asset. Similarly, patents can help an idea through to the stage of product development and add substantial value.

An example of capital expenditure is the spending on railways to improve the connectivity between two places. It helps in the creation of long-term assets and its utility is for more than one financial year. Similarly, construction of buildings, land acquisition for a project, computer equipment, software, furniture and fixture, etc. also comes under Capex as they are all long-term assets and help in improving the living standards of people. A noteworthy feature of Capex is that it helps in improving operational efficiency thoroughly.

Due to its inherent nature, there are many benefits of capital expenditure and the first and foremost is that it helps in improving the efficiency of its beneficiaries and also allows companies to gain a competitive edge. It helps in making an economy or a corporation self-sufficient so that it may not have to rely on others. It also makes the balance sheet healthier so that more investors can be attracted towards investment and better job creation. And finally, it can easily help in procuring loans or facilities by banks and lending institutions.