It is rare to find a business that does not need to replace equipment or buy new assets at some point. There is occasionally a bit of confusion surrounding the purchase of assets (particularly fixed assets) and capital expenditure though. I think we have all been in the position of going backwards and forwards on a decision about whether that new investment is really needed and it’s easy to end up going around in circles. The bottom line is you need whatever assets help your business thrive, so here are a few thoughts that may act as a bit of filter for purchase decisions.
One of the decisions that we all easily trip ourselves up on, is the difference between what is essential and what is not. Clearly there is a requirement for essential equipment, but the difficulty is with what we define as ‘essential’ in many cases. Few things are essential in the strictest sense of the work. The need for a tool set in a garage cannot be doubted because you cannot work without it. But, to take a rather trivial example, you may be able to manage with a pen and ledgers to do your day to day bookkeeping, however, the return of a computer to do them for you outweighs the cost of buying one. Perhaps then we should dispense with the word ‘essential’ from the decision and simplify things by using the word ‘efficient’. It is reasonable to approach your purchasing decision with common sense and assess to the relative value of the purchase in terms of your business. The relative value of a having a delivery vehicle is easy to work out, which model, size of engine and the amount of extras is a decision based on efficiency.
Ok, so having decided what we can legitimately declare as a reasonable purchase we can delve into capital expenditure and fixed assets. Essentially something is classed as a fixed asset if it is likely to be have continuing use for a business for an extended period. A pack of paper for the printer is a consumable but the printer it goes in is more likely to be a fixed asset. There is a bit of a moving line in the sand though on what is a capital asset that you would be best to discuss with your accountant. The size and nature of your business could influence how you treat an asset on the balance sheet.
What your purchase could mean long term
Once you have purchased something that is going to be part of your business assets for an extended period it will influence your ongoing accounts. To start with you have used company funds to buy it, so it belongs to the business. That means it is in the mix until it is eventually written off or lost.
The main considerations are:
Your tax for the year will need to reflect the purchases. With small investments such as the printer example above, this may not be a huge amount. In the case of significant purchases like expensive specialist computing equipment or manufacturing apparatus you could be looking at a significant amount of savings.
Capital purchases will become part of your balance sheet which means they will remain on there as an asset for as long as they are viable. If you then sell the company or close the business, they will be considered as having value on the balance sheet. Remember that this is temporary and the item you purchase will gradually be worth less because it will depreciate over time. The amount it depreciates will vary based on the asset. So, a computer is likely to depreciate at a different rate than something less prone to technological change such as workshop equipment or furniture.
One asset to be particularly wary of is a car. At one time in recent history having a company car was a huge benefit. Things have changed and these days we generally advise against a limited company buying cars unless in some very specific circumstances. The best option when considering purchasing anything for your business is to include it in your forecast, budget for it and make sure you discuss it with your account, so that you can review the decision as part of your financial planning process.