Definition of capital expenditure (accounting): An outlay of a company’s funds on the purchase of equipment, tooling, machinery or sometimes property.
Capital expenditure is often shortened to ‘capex’ when spoken by finance professionals or business people.
What does capital expenditure mean
Capital expenditure is just one of the ways that a business can spend money. Other options include paying:
- Investors, perhaps in the form of a dividend
- Banks for loan instalments
- Employees for services rendered
- Suppliers for raw materials and other products consumed in the core business model
Capital expenditure differs from all of these items because it results in the purchase of a long-lasting asset which is expected to bring benefits for the business for many years.
As a result, capital expenditure does not decrease the accounting earnings reported by a company right away.
Instead, it results in a decrease in cash, and an increase in non-current assets reported on the balance sheet.
A business will then steadily deduct a portion of the capital expenditure from its earnings each year as ‘depreciation’ of the assets acquired until the asset no longer has a residual value.
How is the phrase ‘capital expenditure’ used in a sentence?
“The company has began a three year project of capital expenditure which will see it invest approximately £2m in a new factory fit out in Germany.”
“Cash flow is poor in the second quarter because of the lumpy capex spend.”
About this definition of capital expenditure
Despite being an accounting term, the phrase ‘capital expenditure’ actually uses the economics definition of capital.
The accounting definition usually refers to share capital, which is a completely separate concept to capital expenditure and should not be confused. Share capital is more of a financial accounting topic whereas, capital expenditure would be the subject of a management accounting book.
The economics definition of capital refers to everything except employees which a company uses to be produce goods and services. This neatly fits the scope of what is being purchased when a company undertakes capital expenditure.
How does the definition of capital expenditure relate to investing?
You may hear the term capital expenditure when listening to analysts or management discussing their results.
Capital expenditure often occurs in waves, such as the opening of a new factory or office. Therefore it is often pointed to as the reason why the cash flow of the company has turned negative for a short period.