Three key benefits to taking control of your CapEx
Capital Expenditures are integral to operations in most companies in any industrial sector. From procuring machinery for manufacturing to arranging equipment for a new hire: approval of capital expenditures plays a key role in optimizing asset procurement and management. Investments of this sort can be expensive and usually need approvals from multiple members in the organization.
Think back to the classic example of the travelling envelope carrying anything from donations for an office party to approval documents for purchasing high-end manufacturing equipment. The sheer volume of missed communications, roadblocks, and the envelope simply getting buried on someone’s desk creates enough risk in the process to warrant a much more streamlined solution.
CFA Dan Dorland writes how top performing companies have a defining characteristic of low capital expenditure requirements. Without a well-managed capex process, maintaining expenditure to be less than cash flow becomes a challenge that you cannot handle consistently.
Here’s what a streamlined solution would look like:
- A request for a new asset is generated.
- The request reaches the required members of the organization to the highest level of management for approval.
- The approval is granted without loss of traceability and visibility.
- Now the expenditure can be made at the right time and asset can be procured at the right time.
This process can include as many members in the organization and accommodate non-routine expenses as well as regular expenses. However, streamlining this process also opens the doors for future growth for the company.
It is therefore important for any company aiming to optimize their processes for growth to have a strategic plan to manage their capital expenditure. A detailed strategic plan helps identify which assets need to be purchased, when they need to be purchased, the specific uses of these assets, and ultimately the expected benefits and Return on Investment (ROI) of each expenditure. This initiative yields three key benefits to your company.
Reduces Missed Opportunities
In a company purchasing initiatives, some expenditures are time-sensitive and need to be approved in record time. With the classic travelling envelope, the added risk can often result in loss of opportunities due to expenditures lacking approval at the right time. With a strategic plan and process to manage capital expenditures in place, the amount of times where a request gets lost in circulation can be drastically reduced. This reduction in loss of traceability and visibility results in fewer missed opportunities for key purchases.
The real benefit of planning capital expenditure is to remove extraneous costs that don’t get captured in unplanned activities. When you don’t have a plan to manage unexpected expenditures, you are literally leaving money on the table over the long run. With a strategic planing you can control and manage irregularities by improving the efficiency of the process and ultimately of your capital. Doug Mehl illustrates how achieving just a 20% efficiency in your capital expenditure can become a total game changer in reducing the amount of waste capital and increasing opportunity.
Gain Competitive Advantage
In competitive markets, operating on ever-challenging margins, companies should look for any and all opportunities for gaining advantages over their competitors. Especially with newer companies entering the market, gaining first-mover advantage is a sure-fire way to stay competitive write Carolyn Wirth, Jing Chi, and Martin Young for the Journal of Business Finance & Accounting. A well-managed CapEx process allows you to do so by planning future investments ahead of time and secure that advantage over competitors so you can stay ahead of the game.
In any organization, effective flow of capital becomes the key driver in how the company continues to grow and stay competitive. Maintaining a strategic advantage in the market is crucial in securing market share and managing the flow of capital to reduce irregular and unnecessary expenditure allows you to stay focused on your company’s long-term goals. Do you find it difficult to identify errant investments? Do you often miss out on opportunities due to a misaligned capital expenditure process? Strategically managing your capital expenditure should be your prime focus to increase your chances of consistently achieving your goals.