At what point should a not-for-profit consider investing in a capital expenditure? A capital expenditure can be described as acquiring, repairing, or upgrading a physical asset such as land, a building, or equipment. For the expenditure to be considered a capital expenditure the physical asset must have a useful life that extends beyond a year and the expenditure must meet the organization’s capital expenditure guidelines.
An organization should consider the following before investing in a capital expenditure:
- Are the organization’s competitors improving their capital above that of the organization? If so, are the capital expenditures focused on physical infrastructure, land, or equipment?
- Does the organization have an aged facility? An aged facility may portray the wrong image to the customer.
- Is there a need to expand the facility to increase operating efficiency, expand product lines, or react to competitive pressure?
- How should the organization finance the capital expenditure? The organization should consider either using cash from net income, acquiring additional debt, or entering into an operating or capital lease. If the organization decides to take on additional debt it may affect the organization’s debt covenants.
- Are there enough cash and investments within the organization to cover the additional debt payments if the organization has net losses?
- If the organization decides to finance, should the organization obtain financing with a fixed or variable rate?
- What is the anticipated return on investment for the new capital expenditure?
These are just a few of the items to consider before investing in a capital expenditure. Capital expenditures are usually costly and therefore management should perform their due diligence before deciding to invest in a capital expenditure.
If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor.