Every month you look at the profit and loss statement: revenue is growing, cost of sales is under control, operating profit pleases the shareholders. You build a five-year DCF, the IRR is sky-high, and net cash flow looks flawless. But when you open the bank account - there is no money. Sound familiar?
You have run into forgotten CAPEX. Let us break down exactly which capital expenditures you are ignoring and why your CFO still is not raising the alarm.
Profit and cash are not the same thing. A model can show profit for years while unaccounted capital expenditure quietly drains the balance on your account.
Where does the gap between "profit" and "cash" come from?
The classic mistake is equating profit with cash flow. Profit = income minus expenses (including depreciation). Cash = real inflows and outflows. CAPEX, however, hits cash flow directly, but the P&L only through depreciation (and not always even then). If you forgot to build infrastructure maintenance, component replacement or decommissioning into the model, profit stays high while the cash disappears into thin air.
Studies show that up to 40% of projects in industry and real estate development run into cash gaps caused by underestimated capital expenditure. And the problem is not an arithmetic error - it is the systematic neglect of "non-obvious" CAPEX.
The top 7 CAPEX items you have guaranteed to forget
You bought a new press for $110,000. You budgeted the price, installation and commissioning. But you forgot that in 18 months the hydraulics will need replacing (another $13,000), and in 3 years the motor will need a major overhaul ($28,000). The reality: any asset requires annual investment of 3-7% of its value. In the financial model this is often missing.
A machine has run for 7 years; its depreciation period is 10 years. On paper it is still worth 30% of the original price. But in practice its efficiency has dropped by 40%, and repairs cost more than leasing a new one. You did not build in the replacement cycle - and in 5 years you have to pull a sum equal to half a year's profit out of circulation in one go.
You launched production in a rented workshop. You thought the existing 100 kW substation would be enough. A year later capacity is not enough - you need a new transformer ($33,000) and your own substation ($78,000). Or warehouse expansion: new equipment requires more floor space and climate-control systems.
The model includes servers and workstations. But it forgot: annual licences for CAD/CAM systems ($5,500), updates to the industrial network's antivirus protection ($2,200), security certification of critical infrastructure assets ($13,000). For IT assets the typical lifespan is 3 years, and the CAPEX on data migration when switching platforms can reach 30% of the implementation cost.
You acquired a filling line. But you forgot the checkweighers, sensor calibration, replaceable filters and process tooling for each batch. In discrete manufacturing the cost of fast-wearing tooling can amount to up to 15% of the core equipment CAPEX per year.
You expanded production - and forgot that the law requires you to upgrade the dust extraction system ($28,000), install new gas-detection sensors ($7,800) and buy additional PPE for staff ($3,300/year). The environmental regulator can issue an order, and downtime due to non-compliance can cost tens of millions.
When the project ends, the equipment has to be dismantled. Recycling chemical tanks, removing construction debris, restoring the land plot - these can run into millions that nobody budgets for.
How do you stop losing money? Three steps to accounting for CAPEX for real
Step 1. Move from a static budget to dynamic CAPEX management
Compile a register of all existing and planned assets. For each one specify:
- year of commissioning;
- standard service life;
- schedule of major overhauls and replacements (for example, maintenance every 3rd year, replacement of a critical component every 6th);
- cost of annual sustaining CAPEX (as a % of replacement value).
Step 2. Implement an "end-to-end" cash flow model with detail down to components
Instead of a "total CAPEX" line, break it out into at least 10 sub-items: equipment purchase, installation, commissioning, instrumentation and control, staff training, licence acquisition, infrastructure upgrades, contingencies (at least 20% for projects longer than 3 years), a replacement reserve in N years, decommissioning costs.
Step 3. Audit the CAPEX flow at least once a year
Compare planned and actual capital expenditure over the last 3-5 years. Count how many times you exceeded the budget and which exact under-accounted items were to blame. This will give you personalised "forgetfulness" coefficients for future models.
Why does your CFO not see the problem? (And what to do about it)
Often the CFO works with reporting that does not break CAPEX down by asset. Management accounting boils down to the P&L and balance sheet, while the cash flow budget is drawn up quarterly with no link to the real condition of the equipment. As a result, the "hole" only becomes visible once the money is already gone.
Require a separate CAPEX report from the finance function, broken down by each asset: planned repair, actual repair, replacement forecast, accumulated reserve. If there is no such report, the money will keep disappearing.
A real case: how forgotten CAPEX ate 28% of the IRR
A building-materials manufacturer, an expansion project worth $2 million. The financial model promised a 34% IRR and a 3.2-year payback. Two years on: revenue reached plan, profit was even higher. But there was no cash in the accounts and they had to take out a loan to top up working capital. The CAPEX audit showed:
| Item | Plan | Actual |
|---|---|---|
| Crusher repair | $9k | $47k |
| Conveyor belt replacement (every 14 months) | not included | $12k/year |
| Blasting licence for raw material extraction | not included | $26k one-off |
| Dismantling of the old line (planned to be done "in-house") | 0 | $17k |
The real IRR fell from 34% to 24%, and payback slipped by 1.7 years. Hidden CAPEX amounted to 26% of the project budget.
Profit and cash are not the same thing. The only way to save a business from chronic cash shortages is a systematic CAPEX audit and a switch to dynamic planning.- G-Invest
Summary
Profit and cash are not the same thing. The only way to save a business from chronic cash shortages is a systematic CAPEX audit and a switch to dynamic planning across the full asset life cycle. That way you see every cash-outflow point in advance and avoid a cash gap at the peak of your "paper" profit.
Frequently asked questions
Why does a financial model show profit while there is no cash in the accounts?
Most often because of unaccounted capital expenditure (CAPEX): equipment upkeep, component replacement, licences, infrastructure and environmental requirements. Profit includes depreciation, while the real cash outflow on CAPEX exceeds depreciation charges.
Which hidden CAPEX items are most often forgotten in investment projects?
The top 3: scheduled overhauls and maintenance (3-7% of asset value per year), replacement of fast-wearing tooling (up to 15% of CAPEX per year), and decommissioning costs (dismantling, disposal, land restoration).
How do you calculate real CAPEX for a business so as not to go into the red?
You need to move from broad-brush norms to an asset-by-asset register specifying service life, repair schedule and replacement cost. We recommend building in a contingency reserve for unforeseen CAPEX of at least 20% for projects lasting 3 years or more.
How do you find hidden costs in a construction or modernisation budget?
Run a CAPEX audit using the "asset life cycle" methodology. It includes checking whether commissioning, staff training, certification, safety systems, spare parts and the disposal of old assets have been accounted for. An example is the case in the article, where hidden costs reached 26%.
Why does the standard 10% contingency for unforeseen CAPEX not save you?
Because the forgotten items are systematic, not random. A 10% buffer covers price fluctuations, but not the cost of replacing infrastructure in 3 years or decommissioning work. An adequate model needs a reserve of 20% or more plus separate planning for each asset.
CAPEX and financial model audit by G-Invest
We will build the full life cycle of your assets, find the gaps between the model and reality, and give you back control over real cash - so that the profit on paper matches the balance in your account.