Uncover potential savings through connected CapEx planning with Anaplan
The FP&A team should always plan for capital expenditures no matter what the size of the organization is. An effective capital expenditure plan is essential for long-term asset maintenance and growth as well as short-term day-to-day operations.
An organization’s CAPEX planning refers to its proposed capital expenditures in the near future. Paying careful attention to these investments is important since they carry a high financial risk if mishandled. Optimizing these processes means that finance teams can uncover potential savings through a more efficient use of their budget.
Having comprehensive visibility across departments about capital expenditures allow for better informed decision making and more effective planning. With the help of connected planning platform such as Anaplan, this process can be enhanced to drive finer outcomes.
Breaking down the CAPEX process
In the beginning, every organization will follow roughly the same process when they’re planning for capital expenditures. You may expect to consider the following:
- Assessing the need: analyzing performance data, lifetime span, operational cost, and purchase price to generate an accurate cost-benefit analysis.
- Proper budgeting: It is important to keep CAPEX budgets separate from all other costs, but they should be taken into account in the overall budget. In the event of a CAPEX purchase, Operational Costs (OPEX) like personnel expenses are very likely to arise. The distinction and segmentation of capital and operational expenditures are crucial to make as it could have some financial and business implications.
- Timing and spending limits: Executing a CAPEX plan within a reasonable timespan is essential to ensure the effective use of resources. A narrow schedule could result in low-quality work while a far-stretched one would have a negative impact on the direct and indirect costs. The actual cost should constantly be tracked against the budget. The key to being able to understand those figures is to have a high level of visibility.
Assessing the need for capital
A model-driven approach to CapEx planning can help you identify opportunities for savings and make better decisions. Using the same data to plan your capital expenses across the organization, supply chain, procurement, and finance can uncover potential cost savings.
The supply department does its budgeting by creating new projects, developing a CBS (Cost Breakdown Structure) where they plan on purchasing different types of CAPEX equipment with a high level of detail, and identifying the total budget. Since all supply planners work in the same environment, they can benchmark their plans against historical projects also from other planners on the same equipment.
The procurement department negotiates with suppliers on the delivery of products and services, with whom contracts will be signed. Procurement is able to connect the CBS items to the deliverable categories and map the POs to these categories, thus ensuring the connection with Supply and Finance. In addition, procurement tracks Final Spend, Savings vs Budget, and Non-Procurement Budget.
The finance and accounting teams should first gather and consolidate funding requirements. Determine the time to break even, ROI, and useful lifetime of the asset. Next, proceed to have the project approved after reviewing the proposal.
Keeping approval processes transparent is also imperative: CAPEX planning involves many different departments’ input. Having financial data aligned and visible across the various departments of the organization can make this process smoother, quicker, and more accurate. If you communicate through emails or use Excel files, you can never be sure that you approve the latest version. Standardizing the review and approval process is of the utmost importance to ensure consistency, and to check that the process doesn’t get held up.
Ensuring proper CapEx Budgeting
It is quite common for companies to mix up their capital and operational expenditures when doing financial planning. However, clearly defining these costs can make the financial planning process more efficient and cost-effective.
Capital expenditures cover the acquisition, maintenance, and upgrading of fixed assets, such as buildings, equipment, vehicles, and patents. Operational expenses are expenses businesses incur on a regular basis to continue to run their operations. These expenses include office rent, utilities, and salaries.
In terms of financial implications, CAPEX equipment can be taxed over its life cycle, while OPEX equipment is taxed in the year of purchase. Keeping this in mind, it emphasizes the importance of properly budgeting capital expenditures with clear visibility, so stakeholders know how assumptions will affect financial performance.
Alignment of financial planning and CapEx planning
CAPEX models serve to facilitate departments’ needs by providing accurate high-level CAPEX estimates so that necessary actions can be taken on time. That’s why having integrated dataflows between functional areas is the first step to healthy and optimised CapEx planning.
To better illustrate this, imagine that different geographical areas plan for different functions (business lines) in their CAPEX. It’s great having a global model that gets all the financial data (total CAPEX Budget, 1YP Budget, Actuals, Commitments, and LE) on the project level from ALL areas and ALL functions.
So, if a project lasts longer than a year (multi-year project), both the total budget and the current year budget need to be approved and used for tracking how the financial status of a project is evolving over time. Within the current year, the actual spend, committed spend (future spend) and LE (latest estimated) spend can’t exceed the 1YP budget according to the Zero-Based Budgeting (ZBB) principle.
With all information available for multiple years, it’s easier to estimate your potential savings (or costs) per multi-year project. Not only the On-Top-Performance is visible, but it also gives insight into the relative savings compared to the budget.
By using a connected planning platform such as Anaplan, the actuals and committed budget can be automatically loaded and pivoted in anticipation of changing scenarios. Additionally, the LE budget figures can be submitted and approved on an annual basis on Anaplan. This ensures that there is a single source of truth and that decision-making can be based on the most up-to-date information possible.
When it comes to CapEx planning across the organization, it can differ greatly across different functional areas. However, the more efficient you are with the LE submission, the more accurate the project tracker of your CapEx can be, and the more efficient your spending will be.
Ensuring proper CapEx Budgeting
In order to make this process smoother, faster, and more accurate, financial data across departments of the organization should be aligned. A transparent approval process is also essential since CAPEX planning involves many different departments. Optimizing internal processes and increasing efficiency can be achieved using connected planning. It provides real-time visibility of key performance indicators, making it easier to identify cost-saving and efficiency opportunities.
If you send emails or use Excel for communication, you can never be sure that you are approving the latest version. Standardizing the review and approval process is of the utmost importance to ensure consistency, and to check that the process doesn’t get held up.
The approval of CAPEX should also be routed automatically based on predefined criteria and capitalization limits. Since departments have different views of their CAPEX expenses, making useful automatic (or manual) data links between them is a real challenge.
Anaplan’s Connected Planning can help you streamline your capital expenditure planning process. It gives you the ability to make better decisions about how much money should be allocated to each desired outcome, based on real-time data from across your organization.
We are Anaplan Gold Partners with a team of experienced consultants who’ve implemented CapEx solutions across various industries. If you’re starting to rethink your CapEx processes, don’t hesitate to contact us. We would love to discuss how we can help you uncover cost savings in your CapEx planning through Anaplan.
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