Capital Expenditure, commonly shortened to CapEx, refers to the funds a company uses to acquire, upgrade, and maintain physical assets. These are major purchases designed to provide value for more than one year. Common examples include buying a new building, purchasing heavy machinery for manufacturing, or upgrading a computer server fleet.
When a business spends money on CapEx, it is investing in its future capacity. This is not about keeping the lights on today. It is about building the infrastructure to generate revenue tomorrow.
For a founder, understanding CapEx is critical because it behaves differently than standard expenses on your financial statements. You do not deduct the entire cost from your profit immediately. Instead, the cost is spread out over the useful life of the asset through a process called depreciation. This distinction matters deeply when trying to understand the difference between your bank balance and your profitability.
The Accounting Distinction
#It is vital to distinguish between an expense and a capital expenditure. If you buy a ream of paper for the printer, that is an expense. You use it, it is gone, and you deduct the cost from your revenue that month.
If you buy the printer itself, that is likely CapEx. You are trading cash for an asset that sits on your balance sheet.
This means that a company with heavy CapEx might show a profit on paper while actually hemorrhaging cash. You might have paid one hundred thousand dollars for a machine, but you can only expense a fraction of that this year. Your profit and loss statement says you made money, but your bank account is empty. Founders need to watch their cash flow statement to see the real impact of these purchases.
CapEx versus OpEx
#The most common comparison in business finance is CapEx versus OpEx, or Operational Expenditure.
OpEx represents the day-to-day costs of running the business. This includes rent, utilities, inventory, and salaries. These costs are fully tax-deductible in the year they occur. They are the cost of doing business right now.
CapEx is for the long term. It involves large upfront cash outflows. Investors and analysts look at this ratio closely. A company with high CapEx requirements is often harder to scale because growth requires significant capital injection to buy more assets. A company with high OpEx but low CapEx, like many software businesses, can often scale revenue without a proportional increase in asset costs.
Strategic Scenarios for Startups
#The relevance of CapEx depends heavily on your business model. If you are building a SaaS company, your CapEx will likely be low. You might buy some laptops and office furniture, but your main costs are cloud hosting and salaries, which are OpEx.
However, if you are a hardware startup or a direct-to-consumer brand with your own manufacturing facility, CapEx is your reality. You need to buy molds, tooling, and assembly robots before you sell a single unit. This creates a high barrier to entry.
Founders in asset-heavy industries must plan their fundraising differently. You need to raise enough capital not just to cover the burn rate, but to finance the purchase of the assets required to reach the next milestone. You must ask if it is better to buy the asset or lease it. Leasing can sometimes shift a cost from CapEx to OpEx, preserving your cash pile for other critical growth areas.