Recurring capital expenditures are events that tap into a company's capital resources more than once, on an infrequent basis. An expansion of an office building, for example, would be a capital expenditure, whereas paying utility bills, which are a regular expense, would not be a capital expenditure, instead falling under the operations budget. To explain the minutia of recurring capital expenditures, it helps to shed light upon the basic definition of capital expenditure itself.
Capital Expenditures Explained
A capital expenditure is any business spending that directly contributes toward expanding a business's operational capacity. A capital expenditure could cover anything from purchasing new tools and equipment, to buying a larger production facility or even renovating an existing one. Explained in the simplest manner, expenditures are simply the cost of long-term improvements to a business. Virtually any kind of business requires a capital expenditure in some form; for example, retailers must spend capital to obtain inventory, and likewise production-based industries need to spend capital resources on effective equipment and quality materials.
Budgeting for Recurring Capital Expenditures
Planning for nonperiodic recurring capital expenditures may at first glance seem like a difficult endeavor, but in actual fact dealing with them can be as simple as setting aside a small portion of company revenue over time. For example, if a piece of necessary capital has been estimated to have an operational life of 10 years and costs $10,000, the company could set aside $1,000 toward the recurring capital expenditures account each year. Then, when it comes time to replace the unit, there will be little, if any, disruption to the company's cash flow. Note that changing market forces, such as inflation, also need to be accounted for in the calculation, since an item that cost $10,000 a decade ago likely costs more today.
Example of Recurring Capital Expense in Property Management
In property management, a facility owner needs to keep his property on par with competitors in order to successfully lease out its suites, whether they are for residential or commercial use. An apartment building may undergo renovation, which is a nonperiodic recurring capital expenditure, either for the purpose of necessary structural renewal -- preventing the place from becoming rundown -- or for a décor update. While it may seem trivial, maintaining a modern visual aesthetic in the property management business is an essential part of attracting more prestigious tenants. A property owner may also opt to add functionality improvements, such as a gym or swimming pool, to his facility to increase the competitiveness of the suites on offer. Ultimately, what it boils down to is that recurring capital expenses are an often unavoidable aspect of staying competitive.
Example of Recurring Capital Expense in Transportation
Companies that rely on motor vehicles for their livelihood face a recurring, though sometimes unpredictable, capital expense in the form of vehicle repairs and replacement. A few different approaches are available that the company can use to deal with the realities of that particular business expense. The most common and simplest way is to make repairs as vehicle damage crops up and replace the vehicles once they are completely unusable, which under most circumstances is a reasonable policy. Some companies, such as taxicab businesses, may require their vehicles to be aesthetically appealing to clients, thereby justifying replacement before the total life of the vehicle has elapsed, in which case liquidating old vehicles and obtaining a discount for a bulk volume purchase may be the most strategically advantageous choice in mitigating the cost of the capital expenditure.
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