5 Ways To More Effectively Prioritise Capital Expenditure Planning

When it comes to capital expenditures, there are several key questions to address:

• Why is effective capital expenditure planning so important?
• How do you create a capital expenditure budget?
• What's the best approach to prioritising expenditures?

Without an effective capital expenditure plan in place, you're more likely to overspend--or underspend--on essential fixed assets that will serve your organisation into the future.

Looking to improve your capital expenditure planning? Then read on to learn more about these five tried-and-tested methods. 

Key Takeaways:

• Keep your capital expenditure budget a part of your annual budget.
• Implementing automatic approvals by establishing criteria for purchases saves time.
• Reports are easy-to-share visual stories for people who don't work in finance.

1. Set a Capital Expenditure Budget

It's the most basic of steps, but it's a step you must take nonetheless. Don't make the mistake of assuming that a particular purchase fits into your budget. You must be 100% sure that it's a responsible and viable purchase.

Capital expenditure projects have a way of spiraling out of control without a budget to guide the process. Here are some things you can do to prevent this:

• Specify the maximum amount your company is willing to spend on the asset.
• Collaborate with applicable personnel, such as the head of the department that will be primarily using the asset. 
• Don't forget about the cost of upgrading and maintaining the asset.
• Take cues from similar capital expenditures from the past.

Regardless of the asset or cost, effective prioritisation of a capital expenditure starts with setting a budget.

2. Don't Mix Your Capital Expenditure and Annual Budgets

Mixing capital expenditure and annual budgets is a common mistake that can cost your organisation both time and money. This is particularly true in smaller companies where combining the two appears to be the better way of staying organised. 

Here are some details to keep in mind:

• It's never a good idea to mix your capital expenditure and annual budgets.
• Implement separate approval processes for both budgets.
• Understand the near and long-term financial implications of capital expenditures.
• You must have a separate analysis, budgeting and planning process to ensure that the right capital expenditure decisions are made.

Don't think twice about doing it. Keep your capital expenditure budget and annual budget 100% separate.

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3. Use the Right Numbers, Every Time

CapEx budgeting, planning and forecasting must be rooted in accurate numbers. If you're not using the right numbers every time, you're inviting trouble. Not to mention the fact that this makes it impossible to create a reliable budget. 

At Vena, our Excel-based software solution is designed with this in mind. For example, here's what we have to say about our pre-built CapEx planning logic:

Our CapEx and OpEx software is parameter controlled for easy implementation and customisation. And say goodbye to re-keying data (trust us, you won't miss it). With integration to your source systems, you'll always be working with the latest, most accurate numbers.

The last sentence is the most important. Using our software ensures that you're always working with up-to-date, accurate numbers. There's no guesswork, thus giving you confidence that your forecasting and planning are always on the right track. 

4. Implement a Defined Approval Process

If there's one thing you know about CapEx planning, it's that several people--and several may be an understatement--will have their hands on the process. For example, you may need to consult with people in both the sales and marketing departments before making a key purchase. 

The more people involved, the greater chance there is of making a mistake. And that's especially true if you're using email or a paper trail to share information and make final approval.

Here's why you should standardise a defined approval process:

• To ensure consistency from approval to approval, across the entire company.
• To more easily pinpoint any bottlenecks.
• To provide individuals outside of the approval process with concrete steps.

Another way to improve the approval process is to implement automatic approvals. For instance, you could set criteria that purchases under a specific dollar amount do not require CEO approval. This saves time, while also speeding up the approval process.

5. Use Reports

Think about reports as a visual story. It's a way to share easy-to-digest information with anyone who needs to see it. Here are some examples:

Effective prioritisation of capital expenditure planning often depends on your ability to sync with other people in your company. Here's the problem: As a finance professional, you're able to review and digest information easily and on the fly. But for those who don't work in finance, it's much more challenging.

This is where the use of reports can help. You're not asking someone to read through hundreds of lines in a spreadsheet to understand the ins and outs of a specific purchase. You're giving them what they need--and nothing they don't--in a visually appealing manner.

With Vena, every report you create is based on data from a single source of truth. This guarantees that you're sharing accurate information, which in turn allows others to share an informed and reliable opinion.

Final Thoughts

If you've yet to turn the page, now's the time to get serious about CapEx accounting. Don't sweep it under the rug and hope for the best. Use the five points above to effectively help you prioritise capital expenditures.

If capital expenditure planning is your responsibility, it's also your responsibility to implement an efficient and effective process that suits your company as a whole.

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