Business owners often find that they need to purchase certain capital assets each year in order to keep the business running smoothly. These may range from minor purchases such as computer replacements to major purchases such as replacement of production and manufacturing equipment.
The need and timing for such capital expenditures vary in terms of the industry, the business and the age of the capital assets.
Industry – different industries require different capital assets to operate effectively. For example, a service industry such as an accounting practice would have little use for heavy-duty production machinery, most of the practice’s capital asset purchases would be in computers and related items (i.e., servers, printers etc.). In contrast, the automotive industry requires a multitude of different machinery and equipment in order to manufacture a single vehicle. In this regard, manufacturing and production industries would require higher capital asset purchases (or repairs) in order to continue operations. This would also be the case if there is a new technology that increases efficiency in the business operations.
Business – sometimes owners can control the timing of when to purchase or replace certain capital assets depending on the cash flows earned that year. If the capital asset is still operational and/or the business is not severely impacted in the absence of that particular asset, the owners may delay purchasing another unit or replacing an existing unit until they feel it is absolutely necessary to do so in order to preserve cash in the business.
Age of the capital assets – generally, capital assets depreciate in their utility and efficiency over time due to wear and tear. This is seen when the capital asset has a higher frequency in repairs and maintenance. As noted above, depending on whether the asset is still operational or if it is absolutely required in the business to generate income, the owners may either delay replacing the capital asset to a future date. However, if the capital asset directly impacts any potential future revenues, a delay may result in foregone sales and profits to the company.
Depending on the use of a capital asset the timing of when to reinvest in such assets vary significantly. These variations depend on the type of industry, business and age of the capital assets as well as the business owner’s strategic plan. If the business asset is not essential to the business operations, delaying such purchases may help preserve cash. However, if the asset impacts business operations, delaying capital asset reinvestments and purchases may directly impact a company’s sales and bottom line.