How to Write a Capital Expenditure Policy

Unplanned capital expenditures can seriously damage a company's financial health.

When a company buys machinery, vehicles, software or other items that qualify as assets because of their long-term usability, these are considered capital expenditures. Because of the significant cost, most companies plan in advance for these purchases; but when machinery breaks down or new technology presents an opportunity for a company to streamline processes, spending large amounts of money must be weighed against the utility of the purchase. To create a policy regarding these expenses, management must examine the history of the company's expenses and draw conclusions accordingly.

Instructions

1. Review past accounting records to determine any patterns of expenditure on capital goods and to estimate the yearly unplanned expenditures due to equipment replacement.

2. Establish a template budget that includes past experience and planned expenditures. Estimate the percentage of unplanned capital expenditures and include an allowance for those items.

3. Determine how decisions regarding unplanned expenses have been made in the past and note how successful decisions were formulated.

4. Write procedures for identifying capital expenditures that will go into the budget, including RFP (request for proposal) templates, bid requirements, payment requirements, documentation of need and a list of reviews and approvals that must take place prior to including the cost item in the budget.

5. Write an action list covering how decisions should be made on unplanned expenditures. The due diligence applied to budgeted expenditures should be included, plus a system for comparing expected expenses with revenue assumptions and evaluating the level of risk associated with spending that money.

6. Organize your policy with an introduction stating the goals of the policy, a section covering planned capital expenditures and the process of including them in the budget, a section on unplanned capital expenditures and how they should be evaluated, and a policy for determining the amount of allowance for unplanned capital expenditures that should be included in the yearly budget.

Tips & Warnings

• A policy is only as good as its enforcement. During the process of creating your policy, require all managers who may be affected to participate actively in its formulation and obtain written approvals on every major element of the policy.

• Be prepared to modify your new policy as occasions arise. Controlling the risk of making unplanned capital expenditures involves a strong and responsive accounting department that can provide accurate financial information at a moment's notice.

References

• Investopedia: Capital Expenditure
• Net MBA: Capital Budgeting

Resources

• Read this Article in Spanish