The final component of Free Cash Flow is Capital Expenditures.
What is it?
Generally, money spent to purchase, upgrade and/or maintain fixed assets.
Fixed assets could be interchanged with PP&E, or Plant, Property and Equipment, on the balance sheet or conversation.
What is typically included in that?
- Equipment and machinery
- Computers or servers
However, these costs tend to pop-up. The roof springs a leak. Land needs development or upkeep. Equipment breaks down or reaches end-of-life. Etc.
And are generally not budgeted for, nor a reserve held to address.
So, when they do, they impact Free Cash Flow unexpectedly.
Yet, as a counter-measure, typically large expenses are capped by the board, so everyone gets dragged into voting in an expenditure that is almost always unplanned, unbudgeted, and distracts resources away from strategy.
Therefore, consider some strategic questions:
- What is, and should be, the authorized spending cap on capital expenditures before requiring a board vote?
- Should we be budgeting capex for the year, in addition to revenue and expenses?
- Should we be holding a capex reserve, possibly tied to depreciation, to better forecast these expenses?
Now go spark that revolution.