CapEx is shorthand for Capital Expenditures. These expenditures are investments in various asset classes that are initially charged to the Balance Sheet and are amortized or depreciated over a number years. They offer an advantage over other types of expenditures in that they don’t hit the Income Statement or Profit & Loss Statement immediately. Assets that qualify as capital expenditures include: property, equipment, land, computers, furniture, and certain aspects of software development.
One example of a CapEx would be large equipment expenditures if you’re a manufacturer and have to install a whole set of specialized equipment in order to manufacture your product. Another common example prevalent in the last couple of decades would be technology or product development, if you are developing a digital product such as a SaaS platform (software as a service platform). The type of asset classes being invested in through CapEx may open up alternative options in your investment strategy. There may be specific financing options available for certain asset classes, such as manufacturing equipment, which can be collateralized.
Another example that drives CapEx is what’s often referred to as Per Head CapEx, which is connected to the projected headcount required by your business model. A headcount business model calls for a different complexion of CapEx. Investments based on headcount projections might include furniture, fixtures, machinery, equipment, desks, chairs, computers, phones, and so on. Another typical CapEx is in the area of Intellectual Property (IP) investments, which given the useful life of Trademarks and Patents, are typically charged to the Balance Sheet and amortized over the useful life of the IP.
Here are 4 critical factors regarding CapEx to consider for your emerging impact business, and how your CapEx investments help you gain an advantage by providing security for investors.
These will help you understand the CapEx needs for your impact business and will serve your fundraising efforts by providing important insights for you to consider about how to optimize the path of your business going forward. You’ll want to:
- Identify expenditures to see if any qualify as CapEx
- Determine if your business model is a low or high CapEx model
- Conduct market research to determine typical CapEx for similar business models
- Estimate your CapEx needs for each stage of capital you will be seeking so you are prepared to speak into this with investors
- Low to High CapEx
First, it’s important to know the level of CapEx your business is calling for relative to other working capital requirements, as CapEx comes into play in preparing your business for seeking capital. Investor appetites range in interest across low CapEx to higher CapEx business models as well as understanding the level of CapEx for the stage of capital you are seeking. This said, it’s important to know your CapEx needs relative to your business model as part of developing your capital strategy.
- Use of Proceeds
The larger context of this is usually articulated as part of the Use of Proceeds breakdown when you go out for a capital raise because investors want to understand how their investment will be put to use. This Use of Proceeds statement should ideally be directly reflected through your Pro Forma Financial Model, which will allow you to detail your working capital needs broken down across the various departments of your business, as well as the various asset classes of CapEx.
- Optimal Proportion of CapEx
You may wonder if there is an optimal proportion of CapEx to have as part of a capital raise. Well, that depends entirely on your business model and the industry you intend to operate within. Most investors will use typical CapEx of similar business models to provide a comparable context with which to evaluate your CapEx estimates. It’s wise to include how your CapEx compares with similar business models as part of your market research. The caveat here is that there really isn’t a ‘right’ proportion of CapEx. However, the expected proportion of CapEx for your business model in your industry provides a measure as to what investors will expect when deciding whether to fund your business. Also, as stated previously, it’s important to understand your CapEx needs across the stages of capital you anticipate for your business, as certain business models may be CapEx heavy at certain stages or have a relatively consistent investment in CapEx throughout.
Want to get prepared to raise capital successfully?
Download our Free Fundraising Checklist Here: https://thechangeagenthub.net/fundraising-checklist
Once you receive the checklist you’ll be redirected to a video walkthrough so you can use this checklist most effectively. And you’ll also be invited to check out our 9-step fundraising preparation roadmap with detailed information called Impact Incubator Immersion. This program is the exact process all our impact clients have used to raise capital successfully.
