Achieving Savings with Low CAPEX Risk

Achieving Savings with Low CAPEX Risk

Each time a company allots a certain amount of money for capital expenditures, it entails risks. Some risks are small, such as replacement of old equipment. Others are moderate, which includes purchase of new equipment to increase company production and efficiency. In retail, an example would be opening a new store in a new location. Higher risks include adding a new brand or product line, or acquiring a new company entirely.

The business environment has become so competitive, that pressures to reduce both CAPEX and OPEX are increasing. The capital investment amount is used as basis for calculating ROIs and sets operational business targets on a day to day basis, holding a significant impact in company performance. Capital planning and management is crucial for company growth, but it is challenging to strike the right balance between capital disbursement schedule and meeting the approved budget and targets. Any delay in capital use and going over budget can greatly disrupt business projections and targets.

Finance heads or CAPEX managers are tasked to make projections if the capital investment will eventually lead to the company’s success, sometimes to the far reach of their ability. These projections are required to be made out of due research as they are crucial to the direction of the business. They communicate with the various departments as well as different management levels to be able to identify the best practices and to make the right decision for the company. Such communication and collaboration should be maintained on a regular basis to mitigate financial risks and to address problems as soon as possible.

Companies need to increase if not maintain efficiency for sustainability, growth, and competitiveness in the market; as well as meet the demands of the shareholders. This is often addressed by budget cuts in the supply chain or operation activities. However, most budget cuts are done arbitrarily, reducing product or service quality, without really looking at the root cause of inefficiency. Rash decisions without proper assessment often result to acquiring assets with lower value, but higher capital spending in the long run. There is no specific approach in achieving the right balance, but an organisation should continually assess its performance, as well as comparing to that of direct competitors.

 

Asset Acquisition Process

Acquiring an asset or implementing a new system involves a considerable amount of capital. Hence, a certain process has to be undertaken, to assess the benefit of acquiring the asset, the amount of loss if it is not acquired, other possible uses of the capital in question, and if the acquisition will deliver expected results.

 

  • Benefits. Using capital to purchase new equipment, for example, can increase company revenue in the future if all assessments were done correctly. This means that the equipment has performed as expected, and the preventive maintenance costs were assumed correctly in the financial projections. In the same way, any service acquisitions or system change should be evaluated by expected results. Any worst case scenarios, such as a business recession, should also be taken into account. A recession means lesser transactions that would require the use of the equipment. If the amount used to buy the equipment is from a bank loan, then the end result will even be more drastic. Failure to pay the loan due to revenue decline can lead to bankruptcy. It is therefore the CAPEX manager’s or controller’s duty to prepare a cost/benefit analysis before any capital investment proposal is approved.

 

  • Cost. The CAPEX amount doesn’t only involve the cost of the equipment, but also the cost of installation and spare parts that need to be ordered. It can also incur other related costs such as operating and maintenance costs, electricity consumption, training for use, and repairs. Should the equipment perform poorly, or break down frequently, it doesn’t only affect the capital because of repair cost, but the company’s inability to deliver products on time poses an even larger risk. New and more advanced equipment might also entail hiring a specialized operator or requires training that is expensive. Timing is also important, as buying the equipment now at a lower cost might bring more savings that buying it later. Establishing the cost for acquiring an asset or service involves a lot of considerations; evaluating the asset as well as checking if it would be wiser to spend the money elsewhere.

 

  • Risk. Every possible risks involved, from a macro to micro level, should be taken into account prior to making a decision. The best and worst scenarios should be played out, and if risks are tolerable then the company can proceed with acquiring the asset. Some of these factors to consider are economic conditions, company cash flow, customer needs and behaviour, asset delivery and performance, and asset potential. Cash flow estimates and projections will show possible gains and losses for every scenario. A SWOT analysis is also a vital tool in evaluating expenditure risks.

 

Channel Shift

Like any asset acquisition, introducing channel shift strategies into a company entails an initial CAPEX investment. However, positive financial changes can occur because the savings gathered from the other channels will replace the initial cost in a short period of time. The expected ROI from a channel shift can go up to 250% in just around 3 years.

Its benefits include convenient customer access to services, reduced complexity in providing services, increased customer awareness and demand, increased efficiency due to integration of the front-end and back-end services, reduced cost, increased revenue and savings. Developing mobile websites are optimized to give easier access to customers, who use their mobile devices at all times. Web interaction and online self-help cuts the amount of admin time and staff required, and it minimizes double handling of information.

Channel shift efforts are not risk free. One of the major risks is failure to engage customers into using the new web or mobile channel. However with proper customer insight and communication, this risk can be minimized if not eliminated. Hence, more and more organisations are beginning to rethink how they can redesign their processes implement channel shift.

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