192 CHAPTER 9 GETTING TO NET PROFIT
WHAT CAPITAL SPENDING IS AND ISN’T
It is easiest to define capital spending by considering what it is not. We have already
looked at the cost of sales. These are not capital outlays. Operating costs are things that
you spend money on and it is gone – advertising, wages and salaries, rents, travel and
telecommunications. This is not capital spending either.
Capital spending is spending on productive items with a life of more than 12 months
such as plant, machinery, vehicles, computers, office equipment, fixtures and fittings and
intellectual property. Note that capital assets do not have to be things you can touch and
feel. They can also be intangible items.
The fast track to net prot
1 Draw up a list of capital spending required by your plans.
2 Determine the period and method of depreciation to be used for each item on
3 Draw up a depreciation schedule based on steps 1 and 2.
4 Develop steps 1 and 3 into a detailed capital spending forecast.
5 Divide current spending into functional areas.
6 Divide functional areas into employee and other costs.
7 Divide employee and other costs into detailed expenditure headings.
8 Work through each expenditure heading forecasting the spending required by
9 Bring depreciation from step 3 into the appropriate expenditure headings.
10 Combine the figures in steps 8 and 9 with the gross profit from Chapter 8 to
arrive at net profit.
My department doesn’t make a profit …
You might not have sales income if you are a small cog in a big company, but you
will certainly spend money. This chapter is very much for you.