Businesses often invest in long-term assets such as machinery, equipment, buildings, technology and infrastructure. These investments can have an impact on both cash flow and accounting profit.

Capital expenditure and depreciation modelling is therefore an important part of financial modelling. A Financial Modelling Course can help learners understand how these items are forecast and connected to financial statements.

What Is Capital Expenditure?

Capital expenditure, commonly called CapEx, refers to spending on assets that provide benefits over multiple periods.

Examples include:

  • Machinery

  • Buildings

  • Equipment

  • Technology systems

  • Vehicles

CapEx is different from routine operating expenses because it generally relates to long-term assets.

Why CapEx Matters in Financial Models

Capital expenditure affects cash flow because the company has to spend money to acquire or develop assets.

For example, if a company plans a major factory expansion, the investment may require significant cash outflow.

Therefore, CapEx assumptions can have an important effect on projected cash flow.

What Is Depreciation?

Depreciation is an accounting method used to allocate the cost of a tangible long-term asset over its useful life.

For example, if a business purchases equipment, the entire cost may not be treated as an expense in the same period for accounting purposes.

Instead, depreciation can be recognised over the asset's useful life.

CapEx and Depreciation Are Connected

A financial model often connects capital expenditure with depreciation.

A simplified relationship can be:

Opening Fixed Assets + CapEx – Depreciation = Closing Fixed Assets

The exact model depends on the company's accounting policies and asset structure.

Building a CapEx Schedule

A CapEx schedule may include:

  • Existing assets

  • New capital expenditure

  • Useful life

  • Depreciation

  • Closing asset balance

This schedule can then feed into the financial statements.

Impact on the Income Statement

Depreciation is generally recorded as an expense.

Therefore, higher depreciation can reduce operating profit or net income, depending on where it is recorded.

However, depreciation itself is a non-cash expense.

Impact on Cash Flow

Although depreciation reduces accounting profit, it does not represent a current-period cash payment.

This is why depreciation is generally added back when moving from accounting profit toward operating cash flow under the indirect cash-flow method.

Forecasting Future CapEx

Future CapEx can depend on:

  • Business expansion

  • Maintenance requirements

  • Capacity

  • Technology investments

  • Industry characteristics

A learner should understand the business before selecting assumptions.

Practical Modelling Exercise

A Financial Modelling Course may ask students to create a CapEx and depreciation schedule and connect it with:

CapEx Schedule → Fixed Assets → Depreciation → Income Statement → Cash Flow

This helps learners understand how financial statements interact.

Common Mistakes

Beginners may:

  • Treat CapEx as an operating expense

  • Forget depreciation

  • Ignore asset lives

  • Fail to link the schedule to the balance sheet

  • Forget that CapEx affects cash flow

Practising with different business cases can make the concept easier to understand.

Conclusion

Capital expenditure and depreciation are important components of an integrated financial model.

A Financial Modelling Course can help learners understand how investment in long-term assets affects accounting profit, cash flow and the balance sheet, making it easier to build connected and practical financial models.