Updated: Dec 21, 2021
Capital Expenditure is an outlay of funds that a company uses to purchase, upgrade or enhance the company’s fixed assets like land, building, plant and machinery aka Property, Plant and Equipment (PP&E). Capital expenditure (CapEx) is a long-term investment, expected to produce benefits over a period of time greater than one year. CapEx for a company holds the key to several of its financial outcomes, which include Benefit-Cost ratio (B/C), Return on Investment (ROI), Internal Rate of Return (IRR). Investors and analysts monitor a company's capital expenditures very carefully because it can indicate whether the executive management is investing wisely for the long-term health of the company.
Why traditional CapEx process methods are difficult?
Lack of standardization
Most companies have in place policies and guidelines to undertake the CapEx approval process. Approval is broadly based on meeting the criteria like immediacy of need, justification for investment, besides the availability of adequate data and documentation. In most conventional settings, employees will have considerable freedom to carry out a business process in the way it looks convenient to them. This individual assessment does not necessarily coincide with the best possible way a business process is executed from the overall perspective of an organization. Implementing a process without a guiding framework can lead to a non-standardized workflow and non-transparent business process.
Traditional methods are slow
Existing CapEx processing is manual and paper-based that tends to be frighteningly slow and human-centric. From the time a request for acquisition of a new capital asset is initiated by the head of a department, scrutiny of the proposal moves through many levels in the organization with evaluation note recorded at each level. Difficulty in tracking each stage of the process in the midst of heap of papers can unnerve the concerned stakeholders, particularly when multiple proposals are processed simultaneously. Insufficient information and missing of important information could cause inordinate time delay, and result in missed deadlines.
Manual Processing is error-prone
In the conventional method of spread sheet modelling and sharing files through E-mail, human errors can creep. It may lead to multiple versions of the fact and when such mistakes are cascaded through different stages lead to inefficiency and cast irresolvable damage to a vital financial decision. A poorly planned or executed process can also lead to financial drain in the future. For example, if a company's management team buys new technology that quickly becomes obsolete, the company would be stuck with the debt payments for many years without much revenue generated from the asset.
Automation is the way to go
Standardized Process by rule enforcement
Automating the CapEx Approval request will ensure that the process is carried out in precisely in the way that it has been designed. Rules are explicitly enforced in the workflow as a means to safeguard that business processes are executed in a predeﬁned way, without any concessions.
Quicker Processing with improved collaboration
Forms gather all applicable information to carry out a particular task. Employees can attach supporting documents for the perusal of the management team. A centralized location for forms, documents, comments, as well as a communication log for each request, can help involved stakeholders make quick decisions and minimize any delays. Automated workflows determine which activities need to be performed and in what order.This speeds up the approval process significantly as no manual routing is required.
Capital Expenditure Approval Flowchart