Over the last week we’ve been talking budgeting. As I wrapped up last time, I realized I hadn’t made the distinction between equipment upgrades and capital expenditures. How we plan for those should be different because the way they get accounted for is different. Right off the bat, I want to tell you that I am not an accountant and I’m not giving accounting advice. Talk to your finance people about this to see how they want to do things. You score a lot of points when you engage them early and find out the best way to accomplish what you need to do.
Capital vs. Budget
Typically, capital expenses are big ones. A capital expense cannot be written off in one year because it’s useful life is greater than one year. A CAPEX is something like a mixing console, dimmers, a PA or a projector or video wall. These items will show up on the balance sheet as assets and will be depreciated over the course of multiple years.
Now, you might be wondering about things like microphones. Surely a mic has a useful life of more than a year, so why not make it a CAPEX? Well, it comes down to drawing a line somewhere. For smaller purchases, most accounting folks don’t want to go through the paperwork hassle for a $100 mic. Again, talk to your accounting department and find out how they want to handle larger purchases.
For example, we purchased some high-quality radios at Coast, and while the total bill was almost $800, each piece was under $250. So those were just expensed. However, we found a great deal on 13 Elation Impression 90s. I think we paid something like $700 each for them, but because bought 13 of them, it was a significant expense. Because they work together as a system, and the total was $9,100 or so, it was worth it capitalize. So now, there is a line item on the balance sheet that says, “13 Elation LED Lights” with a value next to it. That value goes down each year according to a schedule.
Planning for Capital Expenses
Most churches—smart ones anyway—have a capital expense budget every year. That budget pays for things like parking lot repaving, air conditioner replacements, new carpeting, chairs and tables and things like that. The trick is to get leadership to think about large AVL purchases as capital expenses just as important as the parking lot.
And think about it; if you are working in a production-heavy environment where the expectation is that the sound is high quality, the lighting looks good and people can see the lyrics and video on the screen, the equipment that it takes to make that happen is important. If it’s important, it deserves to be a capital expense.
The upside of having things like a new mixing console added to the capital expense budget is that it doesn’t come out of your operating budget, and it’s approved differently. The downside is that it may take a few years to come up high enough on the priority list. Which is why planning is so important.
Next time, I want to talk about end of life—not yours, but your equipment. We all know that equipment has a lifespan, and at some point will not be truly functional anymore. Planning for end of life for the gear is critical to maintaing high quality production systems, and I’m pretty sure no one else is going to do it for you. Stay tuned