Capital Expenditures: A Corporate Freebie?

Many managers believe that because a capital expenditure is initially recorded on the balance sheet and the expense can be spread over a number of years that there is only an incidental effect on the profitability of the company – a kind of corporate “freebie.”  This is true enough when taken as a single event, but over time the cumulative effect of acquired assets can create a very large expense that has to be managed (and explained) for many years to come as a damper on profitability.

The profitability of the company has a direct affect on the perception held by banks, leasing companies, trade vendors and potential investors regarding the relative risk and/or value placed on the business.  This perception, in many cases, will determine your ability to maintain existing financing arrangements or to secure additional funding for the operation going forward. Be very certain the investments you make are necessary and the return is sufficient.  You will live with the results for a very long time.