Capital Vs. Non-Capital Expenditures

Business capital expenditures are defined as cash outlays for revenue producing-projects that are expected to have a return over a year into the future. Businesses apply different rules to classify certain equipment costs as capital expenditures, such as dollar values and expected revenue producing life. Non-capital expenditures are those that do not meet capital expenditure criteria.

Non-capital expenditures generally have a lower cost and shorter useful life. An example of a lower-cost item that would be classified as a non-capital expenditure would be machinery components. Regular maintenance on a piece of revenue-producing machinery would also be considered a non-capital expense.

Purchase of a property parcel, a building to house a plant, or machinery for manufacturing purposes would be examples of capital expenditures. Each have the potential to increase income and aid in long-term financial growth. With respect to capital purchases and capital budgeting, a period of longer than one year is considered long term.

Purchase of a non-tangible item or asset can also be a capital expenditure. Things such as research and development projects or extensive advertising campaigns can meet the definition by adding to the financial health of a business for more than one year in the future. An example would be a multi-year expenditure to sponsor a professional sports team. The expenditure is made with the expectation of future financial reward based on the exposure the sponsorship will bring.

Capital budgeting differs from normal business budgeting in that capital budgeting is performed to make decisions on which capital projects will be funded. If a company has two potential revenue-producing business projects with similar capital requirements, the expected return for each project is examined to determine which project has the highest reward potential. Several measures of financial return can be used to make this determination.