Are You Ready to CAPEX?

September 29, 2014

In the most recent edition of AFP Exchange, the Association for Financial Professionals magazine, John Hintze notes that there is more than $1.5 trillion of hoarded cash companies are planning to unleash through capital expenditures to acquire or upgrade physical assets such as property, plants, and industrial buildings or equipment.

As a result of a bullish market, low borrowing rates, and lots of cash, CAPEX is expected to get hotter as mergers and acquisitions are picking up speed across industries.

So are you ready to CAPEX?

While your focus should be on the numbers, here are 3 must-do’s you and your team need to have as you are gearing up to grow your company:

1. Plan effectively

As a CAPEX manager, you have responsibility to assemble, analyze, and forecast financial information to provide sound advice to your organization executives to drive company growth. Putting in place a well-structured project plan will save you a lot of time and effort so you can focus on the numbers. The project plan must include clear and discussed ahead milestones, defined roles, and responsibilities and specific procedure guidelines for key topics including capitalization, procurement, and conflict of interest. According to Sultana Akkan Kassegne, the more streamlined processes are, the easier capex forecasts will be for you and your treasury team focusing on capex, whether it’s growth or replacement.

2. Benchmark wisely

A key component of sound capital budgeting is benchmarking. As you are deciding where to spend the company’s money on replacement capex or growth capex, benchmarking becomes critical.  Growth capex, or capital expenditures, are used to acquire new property, plant, and equipment and are usually driven by company strategy, current projects, and preference between M&A or greenfield projects. Replacement capex, or capital expenditures to replace existing assets required to continue production operations, can benefit from external benchmarking by assessing  trends within your industry, various types of risks, changes in technology, and cost comparisons and projections across 3-5 years.

3. Communicate  holistically

Leading your company’s CAPEX efforts implies constant interaction with company executives as well as budget managers, fixed asset managers, treasury, internal audit, risk management, compliance and legal, as well as field personnel and engineering teams who are actually implementing the capital project.   You can anchor your communication tactic around Total Cost of Ownership (TCO) which is critical to the success of the capex project as it provides a spherical approach of costs from acquisition to ownership and post-ownership involving all the stakeholders touching the capital expenditure project.

So as you and your company gear up to make capex decisions, it is critical that you plan the project analysis, decision, funding, and implementation effectively; it is imperative that you benchmark apples to apples within your industry and examine the technology and cost variations for the next 3-5 years; last but not least, take the lead and communicate holistically across teams anchoring your message on Total Cost of Ownership to advise your company in making sound and profitable decisions to grow and outpace competitors.

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