Medium Scale Business Plan CAPEX Projections – CAPEX projection is very essential in every business plan. How to prepare a business plan for a new business with good CAPEX projection is very vital for the business success. Business plan in entrepreneurship without good CAPEX projection may spell doom for such enterprise.
These are the issues that this post wants to address. No matter the scale of your business, you need to define and evaluate the business CAPEX ( Capital Expenditure) of your business. This post will address all challenges you have in defining, evaluating, depreciating, and appropriating your capital expenditure while preparing your business plan. This is important for a new business, a growing one, and an expanding one. Therefore this post is good for every medium scale business man.
What do you understand as CAPEX?
Table of Contents
CAPEX (short for Capital Expenditures) is the money invested by a company in acquiring, maintaining, or improving fixed (tangible) assets such as property, buildings, factories, equipment, and technology. The other type of fixed asset is called ‘Intangible Assets’ and they include goodwill, trademarks, etc. and all pre-operational expenses capitalised.
What do you know about fixed assets?
The difference between tangible fixed assets and intangible fixed assets, is that as their name imply, tangible assets are those assets you can see physically in existence and are depreciated by stated accounting standards, while those of intangible assets are not physically seen and are amortised by relevant company accounting policies. It’s its depreciation and amortisation values that are charged to the financial statement.
My concern and your concern here is that proper recognition (Listing) , evaluation and appropriation of this cost (CAPEX) while planning or making projections for your business is very necessary in ascertaining the viability of your business. If your net profit figure is wrong due to the effect of CAPEX and its associated depreciation or tax implications, your other business ratios may also be wrong. You need to know that these ratios are business evaluation indicators.
Medium Scale Business Plan CAPEX Projections
What is OPEX?
This is the acronym for Operational Expenses for a business. It’s the aggregation of all the running expenses incurred in running your business. Unlike CAPEX, these are charged direct to the Financial statement ( Profit or Loss account) of the business.
Do not be confused if I tell you that depreciation is always part of OPEX. I have only separated CAPEX and it related costs in this article to show you its effect on your business plan and feasibility study, especially in determining the viability of a business.
Note also that CAPEX and OPEX have different tax implications.
Methods of depreciation:
Right from the on-set, determine the method of depreciation to use and the rate at which you will amortise the intangible assets especially the pre-operational expenses. The reason is that the method of depreciation used determines the value of the asset from time to time. Carrying an over valued fixed asset in your balances sheet is not good for you nor for the intending investors.
CAPEX in Business Plan:
You must ascertain all the capital assets you need for your business. You have to state them in a tabular form. Don’t forget anyone, instead, make provisions for miscellaneous items.
The Investor and CAPEX:
Your business plan could be for regular administrative purpose or to attract investors, partners and even borrowers. Whoever is concerned wants to know what you want to do with the money he/she is investing.
He also want to know how it is reflected in the accounts system of the organisation. The reason is because of the accounting axiom that states that every liability must have a corresponding asset, commonly called Accounting Equation. That is to say that if you have two million Naira or Dollars as equity it must reflect on the asset value.
Therefore a simple equation like:
Equity of N2,000,000 must equal CAPEX of say N1,800,000 plus cash in hand of N200,000.
Medium Scale Business Plan CAPEX Projections
If you can show the investor/partners that their fund is so represented or will be so represented, they will be willing to go with you.
Related to Medium Scale Business Plan – CAPEX Projections in this article are: how to write a business plan, steps in business planning process, CAPEX and feasibility studies, preparing a business plan project report, preparation of business plan in entrepreneurship, how to prepare a business plan for a new business, and the effect of CAPEX on business viability.
CAPEX for different Businesses:
(1) Production/Manufacturing Business.
Any business that has a production outfit, distributive/marketing, and Administrative outfits will have CAPEX for all of these segments. It’s not possible to list the capital items here. Do that by yourself. Click here to read checklist on Business Pan. There is also a post on The Roles of Business plan and start-up processes.
Remember to capitalise all of your pre-operational expenses. Note that such ordinary expenses that could qualify for OPEX are capitalised here just because they are expenses made before the operations started off.
(2) Agricultural Business:
Here you have to provide for land as the most important factor of production in this business. The next items to budget for are the machinery/plants.
The scale of your operations will determine your capital outlay and therefore your CAPEX. Click to read business plan for Poultry business, Ginger Farming and livestock farming. There is a business plan also for Palm oil business.
Medium Scale Business Plan CAPEX Projections
(3) Extractive Industry:
Extractive industry business is highly capital intensive. A lot of capital expenses are incurred prior to operations. During exploration , exploitation, and processing, there are also a lot of capital expenses.
These have to be budgeted for.
Remember that the cost of processing your mining lease, quarry lease, and mineral exploration licences are to be capitalised and amortised over some years of operations. Most expenses using Reconnaissance Permit in solid mineral business are capitalised.
(4) Marketing Business:
This type of business requires capital expenses such as marketing vans, Fixtures and fittings, and a host of other information technological gadgets, both hardware and software.
Click to read a business plan on bakery business.
(5) Service Provision Business:
These are service rendered by accountants, lawyers, engineers, surveyors, business consultants etc. They also require a lot of Capital Expenses to run their businesses.
Whichever type of business you engage in, there must be CAPEX.
Medium Scale Business Plan CAPEX Projections
Any Need for Appropriate Costing?
Yes. There is need for appropriate costing. Appropriate classification of cost, their calculation and appropriation/allocation means a lot for a business plan. I want to illustrate this with a simple layman example, thus:
Example A
Turnover 2,000,000.00
Cost of sales 800,000.00
Gross Profit 1,200,000.00
Admin/Operating Expenses 900,000.00
Net Profit 300,000.00
Included in the admin cost is depreciation of assets for 400,000.00
Example B
Turnover 2,000,000.00
Cost of sales 800,000.00
Gross Profit 1,200,000.00
Admin/Operating Expenses 700,000.00
Net Profit 500,000.00
Included in this admin expenses is depreciation of 200,000.00
This simple example just showed us that mare change in the value of depreciation has resulted in more net profit in example 2. This will also reflect in the financial ratios generated.
Example A Example B
Gross Profit Margin 60% 60%
Net Profit Margin 15% 25%
As you can see from this example, a simple change in the depreciation value in example B has resulted in higher net profit.
Medium Scale Business Plan CAPEX Projections
The fact is that this will affect other parameter of the business. Return on investment, dividend declared, reserves etc. Now note that with the difference in reserve figures, there will also be difference in the net-worth or the value of the business.
Remember too that the value of the total expenses will also affect unit cost of production or sales which will invariably affect the break-even point in terms of value, and volume of operations.
CAPEX as cost element in your feasibility study or business plan can determine if the business is viable or not. It’s therefore necessary that CAPEX will be properly appraised while doing a business plan.
Medium Scale Business Plan CAPEX Projections
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Deacon Anekperechi Nworgu, a seasoned economist who transitioned into a chartered accountant, auditor, tax practitioner, and business consultant, brings with him a wealth of industry expertise spanning over 37 years.
