Capital expenditures (CapEx) are purchases of long-term assets like new vehicles or manufacturing equipment while working capital is the cash a business has on hand to cover daily operations. Working capital is calculated as the difference between a business’s short-term current assets and current liabilities.
Both CapEx and working capital are essential for business growth, but they serve different purposes. CapEx involves cash outflow for long-lived (more than one year) assets, whereas working capital represents money available for short-term (less than one year) operating needs.
Both affect your balance sheet, income statement, and cash flow statement in different ways, which is why it’s important to plan ahead for both. This helps you identify the right type of funding you may need in the future.
This table outlines the key differences between the two along with examples of each.
| Capital expenditure (CapEx) | Working capital | |
| Purpose | Buy or update long-term assets | Fund daily operations |
| Time frame | Assets lasting more than one year | Current assets expected to be converted to cash or used within one year |
| Examples | Buildings, equipment, vehicles, computers | Cash, accounts receivable, inventory |
| Funding | Equipment financing loans, SBA 7(a) or 504 loans, bridge loans | Working capital loans, emergency loans, lines of credit |
Below you’ll find details on where CapEx and working capital impact your business financial statements, and how to match the right type of business loan to each so that you get the right funding to grow your business.
Capital Expenditures (CapEx)
Capital expenditures are funds used to buy or upgrade long-term assets that have over a one-year life from IRS publication 946 including:
- Buildings
- Machinery
- Furniture
- Farm irrigation equipment
- Servers and computers
- Patents
- Copyrights
CapEx typically refers to tangible assets. Major upgrades or improvements like a new roof or rewiring a technology center are also CapEx because they have a useful life over one year and are not part of day-to-day expenses that you’d pay out of your working capital.
Since the useful life of CapEx is greater than one year, you depreciate these purchases. However, you don’t depreciate working capital. That causes CapEx to impact your financial statements differently than working capital.
On your balance sheet, CapEx will increase property, plant, and equipment (PP&E) because you’re buying new assets. That will decrease cash, if you purchase with cash, and increase liabilities, if you use a business loan.
Depreciation adds to the total expenses reported on the income statement. If you use bonus depreciation or a Section 179 deduction, this can be up to 100% of the purchase price in the first year, depending on the year the asset was purchased.
CapEx transactions can affect all three sections of your statement of cash flows like this:
- Decrease cash from investing activities by the purchase price.
- Increase cash from financing activities by the amount of the loan, if any.
- Add back depreciation to net income to increase the cash from operating activities.
Planning for CapEx
Because many capital expenditures are expensive purchases, planning for their purchase more than a year ahead of time is important so that you don’t run into a cash crunch if a machine breaks down at the last minute. This is different from planning for working capital where you’re usually planning out the next year at the most.
If you only have a few long-term assets, planning ahead can be as simple as shopping for specific types of financing like equipment financing a year or two before you know you’ll need to replace the assets. If a lender offers you good terms and you think interest rates will increase in the next year, you’ll be able to secure the loan and trade in or sell your existing equipment to offset the purchase price.
When your business has a lot of assets, then plan for yearly CapEx by putting all your assets on a spreadsheet. Put the asset in the first column and use the other columns to show when your assets will need to be replaced and at what cost. Then, add up the values for each year and plan for the right size of small business loan needed.
Here’s an example for a hypothetical river cruise and tour company:
| Asset | Replacement Cost | Year 1 | Year 2 | Year 3 | Year 4 |
| Large Boat #1 | $180,000 | $180,000 | |||
| Large Boat #2 | $195,000 | $195,000 | |||
| Maintenance and Shuttle Boat | $80,000 | $80,000 | |||
| New Paddle wheel for boat #1 | $35,000 | $35,000 | |||
| New Overhead Covers for tour site parking lot | $35,000 | $35,000 | |||
| New Terminal Building for Cruises | $150,000 | $150,000 | |||
| Total Estimated CapEx | $180,000 | $115,000 | $0 | $380,000 |
By planning ahead, the owner knows whether revenue will be able to cover the funding hike needed in year 4. If not, they know to start talking with lenders about equipment financing or other small business loans. They also don’t overspend or remove too much cash from their business due to the $0 in year 3 since they know it’s not the norm.
Working Capital
Working capital is the money available to cover short-term expenses that keep your business running and can include:
- Payroll
- Inventory
- Rent
- Utilities
- Advertising
While working capital also affects assets and liabilities on the balance sheet, it differs from CapEx in two distinct ways:
- Working capital only includes current assets.
- Working capital affects the operating activities section of the cash flow statement.
To calculate working capital, subtract current liabilities from current assets. Both numbers are on your balance sheet, meaning working capital itself isn’t an expense; it’s the money you use to pay for expenses.
The current assets on your balance sheet include:
- Cash
- Stocks and bonds owned
- Accounts receivable
- Inventory
The liabilities on your balance sheet include:
- Short-term debt
- Accounts payable
- Taxes payable
- Unearned revenue (prepayments by customers)
Once you have these, you can calculate your working capital.
The formula for working capital is:
Working Capital = Current Assets – Current Liabilities
When working capital is positive, you have enough money to cover short-term costs, but if it’s negative, you’ll need outside funding.
Planning for Working Capital
Working capital fluctuates daily as sales and expenses occur, so managing it is a strategic and operational task. Proper planning ensures you can always pay employees, suppliers, and landlords on time.
Because cash inflows and outflows rarely align perfectly, you’ll need backup funding options such as:
- Business credit cards for small purchases
- Lines of credit for large short-term expenses
- Trade credit with vendors
- Working capital loans for temporary gaps
Planning ahead also gives you the chance to use working capital loans for inventory and other needs when you don’t want to use your cards or line of credit.
For example, landscaping companies need more people in the spring but more advertising in the winter. If you buy advertising on credit, the bill will come due around the same time you start paying more workers and you’ll need lots of working capital, especially if you haven’t started collecting revenue from customers.
By creating a spreadsheet with incoming and outgoing cash flow in the first column and future weeks in the other columns, you’ll know when you need to use backup funding. Put numbers for each line item to mark the week received or the week due and match the difference to an increase or decrease in working capital.
The spreadsheet you create shows when working capital is negative by week, so you’ll be able to arrange a working capital loan or other short-term business loan to cover the gap until revenue catches up.
While both CapEx and working capital help your business grow, CapEx is an actual measure of cash whereas working capital represents the money and assets available to cover short-term expenses. Planning ahead is important for both so that you get the right funding type for each and don’t get stuck in a cash crunch where you can’t pay your bills.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
