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Capex Planning Overview 

Capex (or Capital Expenditure) Planning is a process of planning for the money that should be invested in fixed assets – tangible (e.g. computers, machinery, buildings) or intangible (e.g. brand, goodwill, contractual rights).

 

Every organization dedicates a good portion of their time to decide on where, what and how much they want to spend on capex. This is because of the huge financial implication as well as the benefit that would be derived is over a longer period range. Organizations spend today to realize the benefit of the same over the next 5-10 years. Offcourse this varies across different fixed assets – such as computers, machinery or a building.

SAP Business Planning comes with a prebuilt functionality to handle capital expenditure planning. This includes a data model that can be customized to include project based scenarios.

 

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Process of capital expenditure planning 

The process of capital expenditure varies between a scenario where the expenses are planned in a Project based scenario or the one without a project based scenario.

 

Usually in a project based scenario, capital expenditure are planned more holistically not just focusing on the individual asset that are to be purchased. So the decisions are taken based on the total cost benefit of the entire project, offcourse the major portion of it may be on investment towards capex. So in terms of the approval for the budget, the entire project benefits are scrutinized and then the project gets approved. With that all the capex going into the project gets approved as well. However in a non project based scenario, the process goes to upto each cost center or sometimes to the individual assets for certain high value assets. So if particular machinery needs to be replaced, then the budget proposal is submitted for that particular machinery and gets approved based on the cost benefits the replacement would allow.

 

In both the scenarios, since the amount involved is normally very high, very effective process to submit a proposal and approval of those budgets becomes very important in capital expenditure planning. Normally this is a very iterative process, with comments coming from the stakeholders back and forth.

 

So it is very essential to have a product that supports process management with inbuilt workflows to successfully run capital expenditure planning process.

 

SAP Business Planning product comes with inbuilt business process to support capital expenditure planning. The workflow is inbuilt into the business process flows. The process management has the flexibility to configure for both project based and non project based scenarios.  The product also allows extensive support for entering comments for justification.

 

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Driver based model 

When creating capital expenditure planning, it is important to create a driver based model. The drivers would be asset rates, useful life, depreciation methods etc. In a planning situation building a driver based model will help doing multiple what if analysis to see the impact of capital expenditure. For example if the plan is to replace laptops from version 1 to version 2, the rates could vary based on different purchase quantities. If a driver based model is setup, different planning scenarios can be created for each of the rate and see the impact of the same on total capex spends. Also differing useful life or method of amortization could impact the profitability significantly.

 

SAP Business Planning provides for a driver based model where assumptions can be entered by the user and the results are derived based on the drivers. Example of the asset rate is shown below:

 

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Depreciation and amortization 

Depreciation or amortization is the method by which the capital expenditure gets allocated over the useful life of the asset. This allocation impacts the profits and loss position over the useful life of the asset. There are multiple methods of depreciations that can be applied to different types of assets. The most popular being the Straight Line method of depreciation, where the amount is allocated evenly across the estimated useful life of the asset. Different Asset class can depreciate differently and the tool should allow for this flexibility. The allocations of intangibles are known as amortization.

 

SAP Business Planning supports depreciation calculations.

 

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To summarize, capex planning is a very important element of planning process, and the same is built in the SAP Business Planning product.

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1 Comment

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  1. Harsh Talesra
    Nice blog from business perspective. But would like to know more technically. I mean the data tables involved and the logic involved etc.
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