Proper CapEx Management will include good guidelines and tips, and how to increase the success rate of your investment. This video explains how to do CapEx Management step by step.
- What is CapEx Management?
- The difference between CapEx and OpEx and the importance of CapEx Management
- CapEx Management as a method
What is CapEx Management?
Hi, this is Mike Negami, Lean Sigma, Black Belt.
Today’s topic is from this video request.
“Sir make video on capex management.” Thanks, Patel for your video request!
CapEx stands for ‘Capital Expenditure’, which includes not only facility investment such as purchasing land, buildings, machines, but also a large-scale IT system, etc.
Its return on investment (ROI) may not come soon and may be several years later. It will be uncertain, and in case of failure will give you significant losses. Therefore, an investment ’decision is very difficult.
Proper CapEx management will include good guidelines and tips, and how to increase the success rate of your investment.
The difference between CapEx and OpEx and the importance of CapEx Management
There is another term, OpEx, which is the opposite of CapEx. OpEx is an abbreviation of Operating Expense. I made a comparison table about them.
CapEx is a long-term investment. On the other hand, OpEx is a short-term, recurring expense.
Regarding purposes, while CapEx is for gaining future benefits, OpEx is the expense that must be paid to maintain daily operations such as rent, labor, utilities and office supplies.
The important thing here is that all the OpEx expenses appear in your income statement, and it is easy to manage them because you would check the income statement every month. On the other hand, CapEx items show up only partially as depreciation in the income statement.
Since there is no standard accounting method for managing capital investment, CapEx Management will become more important from now on.
CapEx Management as a method
CapEx Management is project management
Let’s look at the flow of CapEx Management. All capital investment is a project. Therefore, know-how of project management is very beneficial for managing CapEx.
It’s a good idea to first write a project charter to define this investment project. There is a video and template about how to make a project charter. ⇒ “How to make a Project Charter – Business Plan for Projects 【Excel Template】 “
This is the Project Charter template.
You would write, why you need to do this project, what you will do in this project, how this project aligns with your company direction, the purpose of this project, time period and budget.
Writing a project charter will clarify the purpose and enable you to plan and manage future investment projects effectively.
Sales Planning, Cost Planning, and Capital Investment Planning
Next, we would like to make a detailed capital investment plan, but we cannot do that right away. Before that, we need to complete various other plans.
Start with sales planning. Clarify “Where, to whom, how many, and how much to sell”. If you’re in a manufacturing company, this will also help you make a production plan.
From the sales plan and production plan, you can make a ‘Cost Plan’ which includes a purchase plan and personnel plan. Only then can we consider a concrete capital investment plan.
Perform investment analysis to calculate return on investment (ROI)
When considering investment projects, it’s rare that there is only one investment idea. Moreover, you should have multiple project ideas in order to choose the best project from among them.
For that, it’s important to know how to prioritize projects. I made a video and template about the Return On Investment, so please check them out. ⇒ “How to use Net Present Value (NPV) and Return On Investment (ROI)【Excel Template】”
Consider making the scenario of expenditure and income as detailed as possible and make an analysis of each investment project. Then, you can prioritize your investment ideas numerically.
Establish an investment approval workflow and record all approval steps
Once again, capital investment is expensive and difficult to forecast, and in the case of failure, it often causes more loss than the investment amount. So, let’s establish the approval workflow of who approves those investments, including experts.
If the plan or analysis is not good enough, you can check it systematically and have it re-considered. It’s also important to document all approval steps in writing. In case of failure, the location of responsibility is clear.
These days, there is specialized software for investment approval workflow. You can also automate it yourself using Microsoft Flow or PowerApps. ⇒ “【PowerApps】Microsoft Flow Basics & Approval Workflow Improvement Project”
Implement the PDCA Cycle in CapEx
At this point, you can finally make an investment, but you should not stop the project here.
The absolute condition needed for any success is to apply the PDCA Cycle. Although an investment is expensive, it’s often the case that that project was finished when the investment was made.
Be sure to periodically apply a PDCA Cycle, such as checking if each investment project is progressing as planned or correcting the direction if it is not. ⇒ “Basics of PDCA Cycle and Management’s PDCA Cycle: Apply Quality Control’s PDCA Cycle for Leadership”
For that, don’t just check the financial statements, but also, it’s important for the created business plan to shape the employee’s action plan and formulate their KPI’s (Key Performance Indicators) and use them in the PDCA cycles.
This concludes the CapEx management topic. I reconfirmed that project management skills and applying the PDCA cycle are so important in any field.
“See these other popular articles.”
- How to use Net Present Value (NPV) and Return On Investment (ROI)【Excel Template】
- How to make a Project Charter – Business Plan for Projects 【Excel Template】