How To Take Control of Capital Expenditures and Efficiently Manage Your Company’s CapEx Spend
Capital expenditures, CapEx, typically account for a large chunk of a company’s annual budget. Whether it’s purchasing new equipment, acquiring a new property, replacing company vehicles, or money spent on research and development, capital expenditures play a key role in keeping a business running.
Managing these projects efficiently is a key aspect of keeping them within budget and on schedule. But capital expenditures are notoriously complex and costly. Many run over budget and behind schedule, costing the company far more time and resources than planned.
Wouldn’t it be nice if you could take control of capital expenditures and manage CapEx spend from a central, efficient system? You can. And in this article, we’ll show you how.
Defining Capital Expenditures
Just to make sure we’re all on the same page for what we’re talking about in this article, let’s take a quick moment to define capital expenditures. Also called capital expenses or CapEx, a capital expenditure is a fixed, non-consumable asset that has a useful life of more than one accounting period. Examples include:
- Equipment, machinery, and company vehicles
- Property and buildings
- Infrastructure, furniture, and fixtures
- Patents and licenses
Capital expenses are distinct from operating expenses and are handled differently for tax purposes. OpEx typically refers to the regular costs of running a business such as administrative expenses, utilities, and routine maintenance. In many cases the line between the two is clear, but there are situations where it can blur (for example, software can be an ongoing operational expense or a capital expense depending on the type of software and how you’re using it). Be sure to consult a professional Tax Adviser when choosing which expenses to categorize as CapEx and OpEx.
Here’s Why CapEx Is Important
Capital expenses often have a significant impact on a company’s future. Making wise decisions around these expenses is a key aspect of investing in your company and managing finances effectively.
CapEx includes expenses that help you maintain operations and/or grow your company. Large investments such as putting a new roof on a building or purchasing equipment needed to expand operations typically fall under capital expenses. These sorts of projects have high initial costs and require careful budgeting and planning.
Another reason that CapEx is so important is because these expenses continue to affect the company as a long-term investment. By their very nature, capital expenditures extend into the future. In many cases, they affect how the company grows and play a key role in your business goals. CapEx decisions are also difficult to undo once the purchase is made, so companies must plan these expenses carefully.
Challenges That May Show Up
Managing such an important category of expenses isn’t without its challenges. And because CapEx involves such large amounts of money and has long-term effects, mismanaging these expenses can be a disaster for your company. Challenges can include:
- Accurate budgeting. Measuring and estimating costs for a capital expense is often complicated. Failing to consider all factors can quickly lead to projects being over-budget.
- Unpredictability. When your company makes a large investment it’s nice to think you’ll receive a predictable outcome. But things don’t always go as planned and it’s impossible to completely eliminate risks (though you can plan for them).
- Long-term planning. When CapEx covers long-term projects (such as industrial projects), the long time-period might lead to issues in discount rate estimation and/or establishing equivalence. Any changes in management might also introduce complications.
- Enforcing policies. Your company most likely has policies in place to govern capital expenditures. However, those policies can be difficult to enforce, particularly when you’re still using paper and spreadsheets to manage CapEx.
All of these challenges are significant, but they’re not impossible to overcome. With processing software designed to handle capital expenditures, you can get all the tools you need to manage CapEx effectively.
NextProcess’ Captial Management Software can provide increased insight and control into your CapEx spend while easing collaboration, speeding up, and streamlining all capital projects. This easy-to-use, configurable software includes capital budgeting tools to help take control of money allotted for capital projects. It also helps with long-term planning and enforcing company policy, allowing you to plan ahead and minimize risks.
Start With a Plan
Even with using capital expense management software, you’ll still need a plan for effectively managing CapEx. The software is a tool to make the job of managing capital expenditures easier. It’s not a replacement for sound financial planning or management practices.
Budgeting is only part of this planning process (though it’s a very important part). More broadly, it’s important to consider the scope of a project before implementing it. What resources in time, materials, and manpower will this project require? What are some realistic deadlines for the project? Can we get the entire plan approved? Only once you answer these questions and collect details related to the project can you generate an accurate budget.
This planning process should also take into account long-term goals for your company. You don’t want to plan for large CapEx investments if they don’t line-up with your overall business objectives. Having long-term goals for your business gives you guides to use in determining whether or not a new capital project should be approved.
Another aspect of long-term planning involves determining how you’ll pay for capital expenditures. Choosing whether to purchase a new asset with debt or use existing funds isn’t always an easy choice. You might find that different choices work better for different projects.
Establish Approval Policy
There’s a reason behind every CapEx request and most often it’s a good reason. Approving every request typically isn’t feasible, however. Your company needs a reliable approval process in place to ensure the return on each capital investment justifies the expense.
The approvals process begins with a cost-benefit analysis. First, start by making sure the proposal is clear and complete. If you’re not sure what the exact nature of a capital expenditure is, you shouldn’t approve it.
Next, compare all the costs and benefits. Remember to consider direct costs like the purchase price as well as indirect costs such as training employees to use a new system or upkeep costs for a new building. And do the same for benefits. Take a look at direct benefits such as better gas mileage from a new company vehicle as well as indirect benefits such as increased customer satisfaction and referrals. You may find it useful to consult industry experts who can help determine the real value of these types of direct and indirect costs and benefits.
Finally, weight the costs and benefits alongside the risks. Think about what situations might put this CapEx project in danger of not returning on investment, and weigh the potential risks against your cost-benefit analysis. You might find it useful to brainstorm alternative solutions at this time and see if there’s a better capital investment that could be made.
Only after a capital expenditure proposal passes through your company’s review process and has received approval should the purchase move forward.
Manage Your Budget
Once you have a plan and a budget in place, you need a way to keep tabs on CapEx projects and make sure they stay on track. The Capital Budgeting Software tools within Next Process’s project management software provides accurate, real-time reporting on capital expense budgets.
When using this software, you get to configure the levels of budgeting detail to meet your organizational needs and structure. Capital Project Management Software, in connection with your existing ERPs, provides a level of control over your budget that’s simply not available when you’re relying on paper or using a program like Excel.
NextProcess software also provides complete visibility into your CapEx spend. With our software, you can search for any project (open or closed), view large projects with just a few clicks, search for individual orders or invoice details, and always access the latest information. The system automatically assigns each project a unique ID that lets you easily track the project to make sure it’s staying within budgets and deadlines.
For more information on budgeting for capital expenditures, see our article “Discover What You Need to Know about the Secrets to Efficient Capital Expense Management and Budgeting.”
Make Sure You’re Working With Accurate Data
In order to accurately predict and plan for CapEx spend, you need reliable data to work with. Without accurate data, you can’t create a realistic budget or manage project activities effectively. With accurate data, your forecasting before and during the implementation of capital expenditures will be more far more helpful.
To help with gathering accurate data, NextProcess’ software works hand-in-hand with your existing ERP to capture all project costs and report on them accurately. ERP systems are crucial record-keeping tools. Our Capital Project Management Software (CPMS) adds to an ERP’s functionality with essential reporting and analysis features for managing planned and actual costs.
Our system also gathers data in real-time, essential for keeping forecasts up-to-date. Project managers can easily access all the information they need to keep forecasts updated. When you have up-to-date forecasts based on real data, you’ll be able to make more informed tactical decisions. You’ll also be better prepared to meet the challenges involved in CapEx management.
Consolidate Project Management
Working in silos isn’t the most effective way to plan or manage most capital expenditures. Large CapEx projects often involve people from many different areas of the organization. Some large companies also have projects that involve collaboration between multiple locations. Plus, some CapEx projects spread out over several years. Put all these factors together and you have a perfect recipe for spend getting out of control.
To manage projects of this scope, you need a system that places all the information in one central location. Capital expenditure management software unifies the entire process of managing capital projects. You’ll be able to run the project using this software from the earliest planning phases to implementation to post-completion review.
CapEx management software makes it easier to keep track of data. It also makes it easier for everyone involved in capital projects to work together. NextProcess’ capital expense software gathers all the information into one software system that’s easy to search and access by everyone on the capital projects team. Our software also lets you choose whether to restrict visibility to a single location or open it up to as many individual users as you like.
Why Choose NextProcess
We’ve already mentioned many benefits to using NextProcess for your capital project management software. In addition to all the great features we’ve discussed in this article, we also offer a fantastic user experience and reliable customer service. All these benefits make our software stand-out from the competition.
Our CapEx software is user-friendly. Your employees will quickly learn to use our software system and we’ll be happy to answer any question they have. Plus, we offer several different software modules that work together seamlessly. This makes it easy for you to automate purchasing, accounts payable, expense reporting, and more at the same time as CapEx. Getting all these tools from the same supplier ensures the software works well together. It also speeds up the learning curve for employees because the interface and dashboard maintain a consistent feel.
Ready to try out Capital Management Software for yourself and see how much control it gives you over your spend? Contact us today to set-up a free demonstration or request more information.
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.