Capital Expenditure Budget

Capital Expenditure Budget

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A capital expense is an amount that is invested in an asset that has long-term usefulness and it helps in creating profits for a period longer than the current financial year. A capital expenditure budget is thus required so that a formal plan can highlight the amount along with the timing of the purchase of the fixed assets which will help in organising activities for the coming year. It helps a government or enterprise to grow and operate profitably and healthily. The sustainability of a business or utility of the asset for a government can be studied in detail and the returns can also be determined which helps to chalk out the best plan.

Capital expenditure by the government can be in many ways as the money can be spent on the acquisition or development of equipment, schools, colleges, hospitals, health facilities, buildings, roads, machinery, etc. At times, the government also procures fixed assets like land that may provide profit or dividends to it in the future. It is a reason why in recent years the government has allocated a larger budget share towards capital expenditure so that infrastructure and capacity building can be promoted rapidly. Physical and social infrastructure leads to high economic growth and capital expenditure plays a major part in the same.

It is important to understand capital expenditure characteristics to fully understand the term and the best way that it can be mobilised for a purpose. Normally, there are two forms of capital expenditure and they include:

1. Expenses for maintaining the operational level within a government or company

2. Expenses that help in increment future growth

However, it must also be mentioned here that normal maintenance or repair funds do not fall under this head as they are shown in the income statement.

There are different types of capital expenditure components and some of the most common ones are buildings and property, vehicles, equipment upgrades and intangible assets. A building, property or equipment upgrade is usually procured using a mortgage or secured debt and their payments are made over many years. The interest expense of debt financing is depreciated along with the asset cost. Vehicles are also considered capital expenditures irrespective of outright purchase or debt financing. Intangible assets include licenses or patents and governments or companies invest in them as they provide returns for many years.