For resort and hotel owners, this can be land, buildings, infrastructure and equipment needed to provide their services. If utilized correctly, capital expenditure spending can maintain and grow revenue. Here are a few things you should know about capital expenditure and how to use it efficiently.

Capital expenditures vs. operating expenses

While both are expenses that a business incurs during its operations, CapEx is specifically designed for long-term growth. It is the foundation of how a company conducts business. Apart from the land and building where the business operates, capital expenditure can include renovations, software, machinery, patents, and technology. Conversely, operating expenses are the costs of doing everyday business. They are short-term expenses that do not yield any long-term gain. Operating expenses can include rent, employee salaries, utilities, travel, and property tax.

How to calculate capital expenditure

Calculating your CapEx is relatively straightforward. The more complicated part is obtaining a precise financial picture of your business. To start, determine the net value of your property, plant, and equipment (PP&E) balance. From here, reference your income statement to find the depreciation expense. Plug these numbers into the following equation:

CapEx = PP&E (current period) – PP&E (prior period) + Depreciation (current period)

Example of CapEx

As an example, we will focus on a well-known Cabo resort. Last year, the resort purchased new software for managing reservations, made necessary repairs to the building, and purchased new computers for the staff. After consulting the balance sheets and income statements, we can calculate CapEx as follows:

PP&E at beginning of 2020: $40,000
PP&E at end of 2020: $50,000
Depreciation: $10,000

$50,000 – $40,000 + $10,000 = $20,000 CapEx

How to manage your capital expenditures

Since the nature of capital expenditures is meant to benefit a company in the long run, it can be challenging to determine the usefulness of each asset. Before making a PP&E purchase, determine what the range of your budget will be. Establishing the amount of available funds will allow you to assess the profitability of the investment. While every business wants to operate as efficiently as possible, the end goal is securing profits.

You will also want to consider the intangible benefits of certain capital expenditures. New technology or equipment could boost company morale by making employees’ jobs easier. This return on investment cannot be quantified on paper, but it is good for business nevertheless. Which is one of the many elements that requires a strategic professional, with a strong understanding of the industry, at the helm of a great resort operation.

The bottom line: CapEx can provide helpful insight into your business’s operations

The effectiveness of capital expenditure decisions can have substantial impacts on a business’s performance. By examining CapEx, we gain insight into how a company invests to grow its revenue. As a business owner, we take calculated risks and weigh opportunity costs to make the best decisions for the company’s profitability. The CapEx can serve as an indicator of how accurately a resort is able to predict and prepare for future demand.