Taking Your CAPEX Planning To The Next Level
By Kevin Hsu - Nov 16, 2016
Capital asset planning is an important task for any business, due to the amount of money and inherent risk that accompanies acquiring new equipment and technology. In order for capital expenditure (CAPEX) to be discernible, open to inquiry, and subjected to a separate approval process, these expenses need to be distinct from the annual budget.
The amount of capital expenditures a company is likely to have depends on the industry it occupies. However, it comes as no surprise that various types and sizes of companies are turning to capital financial planning professionals who offer a CAPEX module, in addition to other core offerings.
These CAPEX modules vary by vendor, but normally include:
- Assembling the line-item details and funding requirements of individual projects and arranging them in a customizable template.
- Appraising the projects against standardized criteria including time to breakeven, return on investments and net present value.
- Administering the analysis and approval operation.
Once individual projects are authorized, CAPEX modules take the expenditure, depreciation, and interest charges and integrate them into budgets, asset registers, cash flow forecasts, and balance sheets.
In today’s world, capital financial planning needs to extend its reach beyond simply managing the CAPEX process.
While having a regulated and consistent application and authorization process for CAPEX will unquestionably enhance productivity, not all CAPEX projects are uncomplicated and clear-cut. Not all capital asset planning is the same, especially in large CAPEX projects which may require the skills of people from many different divisions of a company. These large CAPEX projects, which also necessitate large amounts of investment over a number of years, are oftentimes the ones that are miscalculated and mishandled. Because they can have a major impact on cash reserves and profitability for years to come, miscalculations can result in drastic expense overruns.
In addition, the lengthy-timelines of these extensive CAPEX projects call for assumptions regarding the cost of capital, the timing of funding, exchange rates, and future revenue streams. Combined with professional assumptions about the resulting productivity improvements or the useful life of the asset before it needs to be replaced with newer technology, ensures that the CAPEX project is too complex to be captured solely in a standard template. In order to successfully complete the capital asset planning and precisely forecast the company’s balance sheet 5 years down the line, various components of the large CAPEX project — property, plant, professional fees — will most likely need to be evaluated distinctively depending on the accounting standards that prevail.
So, what should you do to step up your company’s CAPEX planning?
Most of the CAPEX planning modules that are currently on offer are restricted to working with financial data, leaving out components that are needed for managing the risks inherent in larger scale projects. In order to seamlessly receive input from various business managers and technical experts and easily share a common set of data with everyone — both inside and outside the company — a secure access, enterprise-level solution is needed. Without this, the finance team will find it difficult, if not impossible, to collaborate with all of a project’s key players.
In my experience, there are two ways in which the majority of capital asset planning solutions regarding CAPEX capabilities fall short.
1) They lack a real-time mode, meaning that companies are unable to conduct immediate analysis and cannot quickly and efficiently identify the most critical assumptions that need to be handled or alleviated.
2) Often the finance departments are lacking the technical skills needed to build and maintain these kinds of enterprise level solutions. Every time something needs to be changed, updated, or added to the system, someone has to be brought in from either corporate IT or an outside firm. This dramatically reduces productivity and fails to allow the finance team to stay on top of the restructuring models.
All of these issues compiled together mean that your organization’s capital asset planning can be rather challenging when not integrated with the company’s core financial statements: the P&L, balance sheet and cash flow statement. With Kepion, capital asset planning can be driven from other planned activities, such as new headcount, increased production or company expansions. Depreciation, debt schedules and interest expenses will be automatically calculated accordingly. For the smart business owner, Kepion’s Capital Asset Planning Software is the most efficient step in enhancing their capital financial planning.