Definition: A capital outlay is an investment made by companies to purchase new assets or to extend the useful life of one it already owns. It is a disbursement of money that is intended to increase the company’s production capacity.
What Does Capital Outlay Mean?
From a financial standpoint capital outlays are crucial to grow a business. Companies that desire to expand need to invest heavily in fixed assets through capital outlays, also known as capital expenditures. This is the case for manufacturing companies like airlines or textile producers. Since the company’s productive capacity is tied to its machinery and equipment, these investments are the main way through which these companies can grow to reach a bigger portion of the market.
Capital outlays normally come from the purchase, development or construction of fixed assets but there are also cases where companies invest in the assets they currently own to extend their useful life. This is the case, for example, of aircrafts, which can be remodeled in order to continue using them. This practice is less expensive than buying a new one and therefore it is more profitable for the company. On the other hand, a capital outlay has to be carefully planned, to understand if the purchase will actually add value to the company. Financial models are the tools employed by managers to calculate the profitability and value-adding potential of any capital expenditure.
Example
Magna Events LLC is a company that organizes conferences and leadership gatherings for students and professionals in the state West Coast. The company has grown exponentially the last 5 years and the founders are aiming to build a proprietary conference center that they could lease to third parties and use for the company’s self-organized events.
According to the calculations performed by an external consulting firm, the cost of this arena will be around $2,400,000. The company’s Board is currently reviewing the project since it is the biggest capital expenditure ever made by the company since its foundation and, apparently, the project’s profitability is being questioned as not large enough to justify the risk taken by the company.
