Key Factors in Planning Your Business’s Capital Expenditures

When it comes to making capital outlays for equipment or for acquisitions, it is essential for construction industry leaders to evaluate how these expenditures align with their overall business strategy and prepare for potential short-term cash challenges.

However, companies often invest excessive time and energy worrying about expenditures that are no longer significant. To guide your company’s discussions around expenditure planning, here are some key factors to consider:

• Building in flexibility is key. Throughout the year, construction companies may encounter unexpected challenges or secure different projects than initially planned. If the majority of capital expenditure funds are allocated upfront, there's no room to address unforeseen issues, leading to reactive purchasing decisions.
  
  However, if a company intends to invest $25 million to $30 million in equipment next year to replace fleet assets, prioritizing $20 million for urgent planned replacements and keeping $5 million to $10 million unallocated allows for adaptability when unexpected situations arise.
   
• Be prepared to part ways with bad customers. Short-term cash flow challenges are common in the construction industry and can affect a company’s capital outlays. Focus on working with clients who value your work and are committed to paying promptly to avoid any short-term financial strains.
   
• Get comfortable with financing. Another factor that can weigh on short-term cash flow is a conservative approach to capitalization. The construction industry can be particularly sensitive to boom or bust cycles, so many leaders are reluctant to use debt as part of their capital expenditure strategy.
  
  Contractors need to become more comfortable with using debt and explore financing options like rental-purchase agreements for fleet equipment to support their strategies for acquiring new assets.

In conclusion, company leaders must thoroughly research market trends to gain confidence in their strategies or build in flexibility in case things don’t work out. It is impossible to predict with 100% certainty whether a business acquisition or equipment purchase will ultimately pay off. While unprecedented events may occur, capital expenditures are likely to succeed if they fit the work your business is pursuing and align with a well-reasoned strategy.