You have a process to evaluate and justify expenditure of significant capital
 
Expenditure on capital equipment is governed by the projected business performance. Businesses thrive on the efficiency gains provided by investing in modern plant and equipment. Selecting what to invest in requires considerable management expertise to ensure that it delivers the expected benefits
Key Issues
·         The funds available for capital investment are dependent on owners and/or banks providing money. This will be governed by the company’s profitability
·         Businesses can normally identify more items for expenditure than can be funded. Senior management therefore need to be selective when allocating funds
·         Criteria companies use to select capital expenditure items include:
o      Rectification of health, safety and environment deficiencies
o      Increasing customer satisfaction and associated service levels
o      Increasing capability to exploit new products and markets
o      Improving facilities for new product introduction projects
o      Increasing effectiveness of business/manufacturing processes
o      Removal of bottlenecks in the business/factory operations
o      Reduction of inventories by improving the flow of materials
o      Elimination of unplanned stoppages that disrupt customer deliveries
o      Improvement of perceived quality and on time delivery performance
·         Capital expenditure can be justified in order to:
o      Comply with legislation and international standards
o      Mitigate issues identified by your risks assessments
o      Improve the company’s strategic or competitive position
o      Increase revenues and profits from products and services
o      Achieve savings on the number of people employed
o      Decrease the cash needed to run the business
o      Reduce the costs of materials, labour, overheads and services
o      Cut the overall cost of quality and increase quality standards
o      Reduce maintenance costs and improve people’s productivity
·         The financial benefits of investments should be evaluated for each project:
o      Cash flow resulting from the project should be calculated and either discounted at an appropriate rate or by using the Internal Rate of Return to compare with your company’s cost of capital
o      Payback methods are not fully reliable, because they do not allow competing investment proposals to be accurately compared
·         A formal process should be established for sanctioning significant funds
·         Sanctions should include all the costs associated with the investment including items such as: installation, tooling, site work, training, services etc
Factors for Success      
Factors to  Avoid
1.     You are rigorous in evaluating alternative options
1.     Investing funds in inappropriate items
Who does this apply to?
Senior management teams
Realisable Benefits
Enhanced business performance leading to a quantifiable competitive advantage

Guides:

Factors affecting financial performanceFactors affecting financial performance

Factors affecting financial performance

Cash flowCash flow

Cash flow

Determining the cost of productionDetermining the cost of production

Determining the cost of production

Justifying the make versus buy decisionJustifying the make versus buy decision

Justifying the make versus buy decision

Justifying capital expenditure decisionsJustifying capital expenditure decisions

Justifying capital expenditure decisions

Managing debtorsManaging debtors

Managing debtors

Managing creditorsManaging creditors

Managing creditors

BudgetingBudgeting

Budgeting

Providing management informationProviding management information

Providing management information