Discover What You Need to Know about the Secrets to Efficient Capital Expense Management and Budgeting
Everyday business expenses, like buying computer paper when you run out, are relatively easy to keep track of. But businesses also handle larger expenses, like acquiring office equipment or a new property location. These are capital expenses – a fixed, non-consumable asset that has a useful life of more than one accounting period.
Also called capital expenditure or CapEx, these large scale capital projects often involve significant amounts of money. Because of their long-term nature and higher cost, capital expenditures can easily become difficult to manage and control. If that happens, mishandled capital projects have the potential to cost your company thousands of dollars.
It is possible, however, to make capital expense management and budgeting an efficient process, especially if you have the right tools as budgeting software. A capital expenditure management system that includes capital budgeting software is a good place to start. This system will help with tracking budgets and planning for expenses. It’ll also make it easier to implement the secrets to efficient CapEx budgeting that we’re sharing in this article.
Separate CapEx and OpEx
Most companies find it useful to budget for operational expenses and capital expenses separately. Capital expenditures require more careful planning. They’re the expenses that help you maintain operations and grow your company long-term. Capital projects often stretch out over several years and play a big role in the company’s future.
Separating the budgets also makes it easier to handle taxes for each category of expenses. When something is an operational expense, deductions apply to the current tax year. Deductions for capital expenditures are spread out over multiple years. Money spent on a capital asset is deductible from your tax liability via depreciation over as long as 10 years.
Prepare, Plan, and Approve
One of the quickest ways to let CapEx budgets get out of control is to start the project without adequate preparation. Before beginning any project, you need to identify the project scope, figure out realistic deadlines, and make sure the entire plan is approved.
This is the stage where you should do a cost-benefit analysis and start thinking about the internal resources the project will require. These include finances, materials, manpower, and services. The more detail you have going into a project the more accurate a budget you can generate. This helps with establishing a realistic “capital spend ceiling” – the maximum amount your company will spend on acquiring, upgrading, or maintaining this capital asset.
Choose How You’ll Fund the Project
One choice you need to make in the beginning stages of starting a new CapEx project is whether you’re going to set aside money for purchasing a capital asset or add debt to your balance sheet. If you save up money before making a purchase, that often means you’ll have to wait to get the needed asset.
On the other hand, borrowing money increases your debt and if things don’t go well there’s a chance that it could cause problems for your future borrowing ability. There are pros and cons to either choice, and you’ll have to weigh those for each capital expense. You might find that it makes sense to make different funding decisions for different projects.
Use Good Budgeting Software
Choose a reliable, capable program for managing costs from the very beginning of your project. Something like Excel isn’t practical for large scale capital projects. Even for smaller projects, Excel is still labor-intensive, time-consuming, and complicated. And there’s too high a risk of errors slipping in and throwing off your CapEx budget.
NextProcess’ Capital Project Management Software includes capital budgeting tools with configurable levels of detail. You can customize the system to fit your organization and our team of experts will work with your company to tailor the system to your individual processes. Our software also integrates seamlessly with your existing ERPs and with the other software solutions that we offer.
Consolidate Approval and Management
Working in silos is not an effective way to plan or to manage capital expenditures. When choosing whether or not to approve a capital expense, you often need feedback from several different departments to determine whether the expense is cost-effective. With digital tools like NextProcess’ CapEx software, you’ll be able to easily get company-wide feedback and involvement on capital projects.
These tools also enable consolidated, collaborative management of capital projects after they’ve been approved. You can run each project using this software from the earliest planning phases all the way through post-completion review. And you can do all this while making the process transparent and granting access to everyone who needs to be involved.
Capture Accurate Data
It’s impossible to manage capital projects efficiently without accurate data. When you don’t have reliable information, you can’t create a realistic budget, generate useful reports, or see how well the project is progressing. If you want an efficient CapEx budget, you need an accurate look at what you have to work with.
NextProcess’ system easily integrates with your existing ERP to generate accurate reports on all project costs. Our capital expenditure management software delivers granular detail on your capital projects and provides complete spend visibility. It also updates in real-time, which is essential for keeping forecasts up-to-date.
Get the Levels of Detail Right
What’s the optimal level of detail for budgets and financial forecasts? The answer depends on who you ask and varies depending on a company’s individual needs. It is a question that you’ll need to answer for your organization in order to make your CapEx budget as efficient as possible.
Too little detail and the budget will be so vague it’s not useful. But too much detail and you’ll spend so much time gathering information that it’ll be outdated by the time you get the budget finished. Finding the right balance is key to efficient capital project management.
Create Clear Policies
Managing capital project expenses across a large organization involves many different employees. In some cases, you’ll be working across multiple departments, states, or even countries. To keep the budgets on-track, you need clear policies in place that everyone is expected to follow.
Training, documentation, and easily understood policies are a big help in keeping spend caps in place for all budgets, including capital projects. But they’re not always enough, especially when you’re managing multiple, complex capital projects. That’s where capital expense management software can help. This system consolidates all project data in one place that everyone involved can access. The system also automatically enforces your company’s customized policies.
Stay on Top of Things
With reliable CapEx software in place, you have the tools you need to start your capital project off right and keep things on track. NextProcess software provides accurate, real-time reporting on capital budgets and CapEx spend. The ability to quickly search for any project, open or closed, and view project details with just a few clicks provides you with complete visibility into the financial side of capital project management.
Automation within the program routes projects and sub-projects for review and approval in the most efficient way. You can also configure different approval requirements based on project type, project total, region, and more.
Ready to put capital expense management software to work for your company? Simply contact us today to schedule a demonstration and see how our software can make your project management more efficient than it’s ever been.
Disclaimer: The information on this website should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts.
Although the information contained here is presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters.