U.S. shareholder-owned electric utilities are expected to spend a combined 132.2 billion U.S. dollars on capital investments in 2021. Despite the pandemic putting a strain on many in the energy industry’s pockets, capital expenditure increased to 139.8 billion U.S. dollars just last year.
Capital expenditure (CapEx) accounts for the most significant portion of a company’s annual budget in a majority of cases. CapEx is the process of buying new equipment and land, replacing vehicles – and it even goes into the realm of R&D. Capital expenditures are a significant component that accounts for how successful a business will be in the long-term. It is with no surprise that statistics demonstrate that capital spending is still going strong despite COVID-19.
Efficiently managing large-scale projects is a fundamental part of keeping projects on budget and on time. However, capital expenditures are complex and can cost a significant amount of money, so the approach must be fitting to account for this complexity.
It often happens that capital expenditures run over budget and lag in schedule, costing businesses more time and resources than initially anticipated. Keeping this in mind, we need to ensure that capital expenditures and management of CapEx spending is conducted effectively. And, to achieve this effectiveness, companies are looking towards process automation.
Capital expenditures are fixed, non-consumable assets (capital) that account for more than one accounting period.
Capital expenses are also different from operating expenses and are approached differently for tax purposes. To highlight the difference, CapEx stands in contrast to OpEx – what is generally referred to as the routine costs of running a business; things like administration expenses, utilities, and regular maintenance. In most cases, the distinction is clearly defined; however, sometimes, it is blurred. Software can set it as an operational expense or a capital expense; this, however, depends on how the system you are using is deployed.
Note that your capital expenses have a substantial impact on the future of your business. It would be best to make informed decisions regarding such costs as they are a fundamental aspect of putting money into your company and effectively managing your finances.
CapEx also includes expenses that will help you run your daily operations and grow your business. Larger investments such as a new brick-and-mortar store or buying equipment needed to expand operations usually go into the category of capital expenses. Projects of this nature generally have a high initial cost and require budgeting and planning approached carefully.
Expenses continue to impact businesses as they are investments that show results immediately; and, at their core, expand to the long-term. Often, they can influence how a company matures, which plays a key role in future spending.
CapEx decisions are difficult to roll back on once a purchase is made. That’s why you need to plan expenses carefully.
While this is seemingly straightforward, managing your CapEx comes with many challenges because CapEx is part of large monetary investments with long-term effects, so if these expenses are mismanaged, you can put yourself at risk.
Challenges include the following:
- Measuring and estimating costs for capital expenses. If you fail to consider every possible investment factor, it can quickly lead to projects running over-budget.
- When your business makes a large investment, you may assume that you will receive a predictable outcome. Yet, processes don’t go according to plan, and it may become impossible to eliminate risks.
- When CapEx covers long-term projects like industrial projects, the long-term period might lead to discount rate estimation issues and equivalence. Any management changes might also aggravate the situation with further complications.
- Your business will most likely have policies and guidelines in place for the governance of all capital expenditures. However, those policies are challenging to enforce, especially when you are using spreadsheets.
These select challenges are compelling, but overcoming them isn’t out of the question. They can, indeed, be overcome and kept well within your control when you use CapEx processing software which is used to handle large investments.
Analyst Bottom-Line
Following a 52% drop in the second quarter, capital expenditures in the oil and gas extraction industries increased 11% to $4.5 billion in the third quarter of 2020. Year-to-date spending totaled $17.1 billion, a 34% decline over the first three quarters of 2019. Management of such significant investments must be done prudently so that nothing slips through the cracks.
CapEx software provides more understanding and a 360-degree view into CapEx spend while making the collaboration process easier, faster, and more streamlined. User-friendly software that can be configured for individual and departmental needs includes capital budgeting functionalities that help control capital allocated for capital projects. Finally, CapEx software also functions for long-term plans and enforces company policy, which lets you plan and mitigates any foreseeable risks.
Are you ready to take control of your spending? CapEx software may be just what you need to manage your investment projects.
