Undoubtedly, your CapEx spending is tied to cash flow. That’s why knowing the right decision to make when deciding on a particular portfolio is so important.
There are several ways to examine which investment will be most effective and lucrative in the long run as there are two types of CapEx investments:
1. Growth CapEx
2. Maintenance CapEx
Are you looking to expand your business or are you looking to maintain your existing assets? That’s a decision that will determine if you are going to go with option 1 or two.
As a business owner, you need to ensure you have the resources in place to take the most profitable route. Yout either want to pull money back into the business or, look to maintain the capital you already have. If you are moving forward with an investment, you need to decide how you will be paying for it: is it better to use cash or debt?
Let’s take a look at both of these options so you may understand which to go with it in any given situation. Let’s explore the most effective way of financing your investments.
Should I be maintaining my current assets?
Capital expenditure that looks to expand your business is CapEx is a part of making an investment. CapEx works to keep existing operations running. If you are looking to upgrade your security system or replace older computers, what you are doing is maintaining the status quo. Maintenance CapEx works to improve or replace so that you can maintain operational performance.
Should I be expanding my enterprise?
Growth CapEx is a decision made when it comes to growing a business.
It differs from maintenance CapEx because it works to maintain the current state fo your business. To highlight the distinction, let’s take a retail store for example.
Let’s say you are a retail owner and want to paint and refurbish your brick-and-mortar store as well invest in a new fridge and remodel your washrooms. Here are you are engaging in maintenance. Conversely, acquiring a new store means growing your company.
Should I finance my Capital Expenditure?
You’ve got two choices when making a CapEx investment. You either spend internal cash flow on the investment, or you use debt to finance it. The Bank determines your credit status and your resources to determine how you will use your cash. Because CapEx carries a hefty price tag, it will take a toll on your finances. The more you spend, the less money you will have for debt payment. If you are using debt to finance your CapEx, it won’t reduce cash flow – but with cash at hand – it will
Financing CapEx internally, means you are going to use a fixed charge coverage ratio (FCCR) – something that will determine your ability to repay the debt. You will need to present an estimate of internally financed CapEx so the numbers aren’t going to include on the financial statement. However, you undoubtedly will need to repay the debt.
These three approaches to CapEx directly impact your cash flow. If maintenance costs are too high – your internal cash flow will be reduced. Furthermore, if future maintenance costs will be high free cash flow, what you spend be negative. Debt helps this situation if you don’t have cash-at-hand.
In conclusion…
Undoubtedly, investing in capital is expensive. That’s why taking the time and being careful about making the right decisions is so important. You need to ensure that your decision-makers are strongly looking to choose the right portfolios.
It looks like corporations around the world as loosening their purse strings when it comes to capital expenditure. Many enterprises whose balance sheets are flush with cash, it becomes critical to choose which investments to make.
While there is always economic uncertainty, many are wondering what will make the difference between capital expenditure programs that deliver value and competitive advantage, while those that don’t.
Making a sound investment decision, whether it is for growth or maintenance, is something you have to analyze considerable in order to make sure money is coming back to your enterprise.
How effectively are you managing your portfolios? Is it time for growth or expansion at the current time?
