ARTICLE

7 Key Stages of the Capital

Expenditure Management
(CAPEX) Process

All organizations incur two types of expenditure: The subject matter and project management business
Operational Expenditure, the benefits of which resources required to successfully deliver large capital
are derived in the reporting period, and Capital projects are time-constrained. The demand for project
Expenditure (CAPEX), the benefits of which accrue funding invariably exceeds the supply of time and money.
over the useful life of the asset procured.
Investment decisions are made by management on behalf
By its nature, Capital investment is of higher value, longer of owners and other stakeholders. Consequently, there is
lasting, and inherently riskier. Some CAPEX is mandatory a governance responsibility to ensure that an end-to-end
(compliance), some imperative (replacement of key CAPEX process is seamlessly designed to meet the needs
components), and some discretionary (growth investments). of all participants including project sponsors, financial
controllers, resource managers and the key stakeholders.
Organizations will frequently need to fund major Capital This article describes the key stages of this CAPEX process,
investments through borrowing or even equity raising. and the interaction with related follow-on activities.

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BUDGETING
The organizational strategy determines the Capital • Investment Reason (eg Compliance, Replacement,
investment level, allocation and priority. Organizations Saving or Growth)
entering a growth phase will allocate a greater proportion of • Scale (eg order of magnitude classification: major
their reserves to long-term Capital investments to underpin (>$5m), very large (>$1m), large ($>100k), regular
and drive that expansion. Conversely, where a business unit (>$10k), minor ((<$10k).
is deemed a cash-cow, Capital investment will typically be • Rough Budget Estimate Overall and spend by period
tightly constrained with a focus on replacement and short- (month, quarter or year)
term cost saving measures only.
For most organizations, the Capital budget is prepared
Required resourcing levels and anticipated operating annually and factors into the operating plan (eg assuming
performance will be forecast based on proposed Capital that we open the 3 news stores budgeted in Q2, I expect my
investment in new buildings, machinery and equipment and sales and wages bill to increase by x% over last year, and my
vehicles. Increasingly, growth relies also on investments in depreciation and cost of capital charges to increase by y%).
intangible assets such as software, trademarks and patents.
This strategy-aligned proposed Capital investment program The Capital investment priorities reflected in the budget thus
is represented by ‘the Budget’. reflect the strategically aligned intent of the organization
and needs to be carefully monitored and controlled. Indeed,
The capital budget typically contains an approved list of capital expenditure variances to the approved budget are
Capital investments categorized by: very carefully monitored by the most senior executive
officers and directors. The approved budget and current
• Operating Unit (eg Plant, Division, Department) budget availability status must be effectively communicated
• Asset Category (eg Fixed Tangible, Mobile Tangible and to all participants.
Intangible categories)
• Priority (initial prioritization based on strategic Within SAP environments, the Capital investment budget
importance) is represented by an Investment Program (a hierarchical

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reporting structure) with assigned Investment Program
Positions (the individual budget items). These Investment
Program Positions (IPP’s) reflect either unique projects (large
strategic investment initiatives eg Plant x Refurbishment)
or investment pools (Spare Part replacements for Plant y).
Recommendations for the configuration of these Investment
Programs is the subject for a different blog post.

The budget is typically filtered and confirmed by the

executive committee based on Wishlist proposals.
Therefore, whilst the Capital Budget is likely the most
important step of the CAPEX process to help align Capital
spend, the process commences one step earlier: with the
Wishlist proposals.

WISHLIST PROPOSALS

Every manager wishes they had something more that would

Wishlist items should be encouraged by all staff members to
make their area of responsibility more efficient and effective.
ensure completeness of consideration, but there is limited
Most of these wishlist items will be of value – and this is
benefit spending excessive effort in a Wishlist submission
indeed what makes the CAPEX process so challenging: there
if the item is unlikely to be approved due to competing
are invariably more good opportunities for investment than
priorities. Local area responsibility managers are required
human and financial resources available to fulfill them. The
to select the most promising Wishlist items for their
challenge of optimizing the CAPEX portfolio decision making
higher-level budget requests. A subset of these group-wide
relates to:
submissions is then normally approved in the final ‘Budget’.
The funnel effect of reducing the potential Wishlist items to
• Not approving bad investments that destroy value
an approved budget item is illustrated above.
• Not choosing poorer investment that deliver sub-
optimal returns
CAPITAL EXPENDITURE REQUESTS
• Missing out great opportunities for investment
altogether A Capital Expenditure Request (CER), sometimes termed
Authorization for Expenditure (AFE) or Request for
The key purpose of the Wishlist process is to hoover up Appropriation (RFA), is the key step in the process to allow
all these ‘great ideas’ and run them through a preliminary procurement activity to commence.
evaluation process so that the departmental CAPEX budget
submission contains value items only and ensures that no Due to the evolving nature of business and priorities, the
nuggets of gold are left behind. Capital budget is seldom executed as planned. New ideas
and imperatives emerge; so whilst CER’s are normally
For this reason, Wishlist proposals are simpler to complete linked to a Budget item, there needs to be flexibility to
than Expenditure Requests and are generally more accommodate both Unbudgeted Requests and Budget Shift
qualitative than quantitative in nature, with only rough (reassignment of budget between requests).
estimations of financial costs and benefits. Submission of

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It is at this stage that a formal Business Case is normally maintained to allow an aggregated view of funding and
required, and that delegation of approval policies are resourcing requirements to be managed.
enforced.
Ideally, it is the responsible manager who should
On approval of a Capital Expenditure Request, an Investment complete the forecast, subject to a review and approval by
Measure (Project Work Breakdown Structure or Internal management. Forecasts are done on a periodic basis, and
Order) is generated in SAP, the approved budget is assigned, each forecast version can be retained to identify changes.
and procurement activities can commence.
Effective budgetary control is enabled by comparing the
FORECASTING overall budget to the incurred costs (actual, accrued plus
committed) and the remaining forecast to complete.
Once Capital Expenditure is approved and procurement
commences, the expected actual costs and timing become
more certain. These updated cash flow forecasts are

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 An effective CAPEX
management solution will
ensure policy compliance,
seamless security and deep
informational content.

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 INVESTMENT REVIEW

Every Capital Expenditure Request should define its

anticipated business benefits. Some investment reasons are
obvious, for example the replacement of critical equipment
or adherence to new Health, Safety, Environmental
and other Legislative compliance. However, even these
investments tend to have a component of derived
improvement to the status quo, or justification for more
expensive alternative due to extended lifespan, risk profile
or other qualitative benefit.

The key purpose of a structured Investment Review is to

assess the benefits realization. If the actual results vary
negatively, relative to those promoted, the review enables
you to understand why, and adjust the assumptions,
approach, and controls to help prevent recurrence in
PROJECT COMPLETION
the future. In many organizations the Investment Review
Asset acquisition costs include all the related costs such is undertaken by the Internal Audit functional on a
as inbound freight, site preparation, labor and material sample basis. The knowledge that the business case
costs to get an asset into a commissionable state on outcomes purported in a Capital Expenditure Request
the capitalization date. These costs are controlled in an will be subject to future review acts as a power factor in
Investment Measure, which in SAP is either a Project Work ensuring reasonableness, transparency and diligence in the
Breakdown Structure (WBS) or Internal Order (short-term preparation of investment proposals.
cost collector much like a Cost Centre, but with a defined
purpose). Of course, the future is always hard to predict, and often it
is the higher-value, innovative investments that have the
At the stage of project completion, the following activities greatest degree of variability of success. It should not be
are performed: expected that every investment fully achieves its targets,
as it is not in the best interest of stakeholders for an
• The target accounting assignment is transferred from organization to take no risks. What is important is that the
an Asset Under Construction to one or more ultimate
Fixed Asset master records
• The Investment Measure status is updated to be
Technically Complete to prevent addition costs being
incurred
• The accumulated costs are re-allocated (settled) to the
final fixed assets
• Any un-utilized budget is returned to the Investment
Program to be available in support of future Capital
Expenditure Requests

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organization learns to assess risk more effectively, and that occurring, to help focus management attention, rather than
through a diversified CAPEX investment portfolio achieves to prevent any variations from occurring at all. Indeed, the
the threshold return commensurate with organization’s classic ‘annual budget’ process in line with an organization’s
risk-tolerance profile. So, whilst some initiatives might Fiscal Year and reporting cycle, is deemed by many to be too
not succeed, it is equally important that others achieve rigid in today’s fast-paced environment. Many organizations
better than expected results. Any bias in the assessment of are therefore starting to operate rolling forecasts as a basis
expected returns towards being too optimistic should be for more agile control.
quickly identified by an effective Investment Review process.
Furthermore, the line between Capital and Operating
ANALYZE AND ADJUST Expenditure is increasingly blurred. In line with the recently
introduced International Financial Reporting Standard 16
The most crucial activity in the CAPEX process is the ability
regarding the appropriate capital accounting treatment of
to surface relevant and reliable information at all stages in
Leased Assets, these purchases are now typically processed
the process from the Wishlist items to the Post-Investment
through CAPEX, with the distinction only as to funding
reviews. The goal should be to inspect the process and
(outright or leased).
outcomes objectively, and to adapt continuously to
deliver an optimal return on investment in line with the
Much Capital Expenditure also has a significant Operational
organization’s risk profile.
Expenditure component. For example, Software purchases
typically have an on-going maintenance and support
The ability to track and control Capital Expenditure in-line
component. Therefore, for effective assessment of an
with the Budget is often seen as a process imperative.
organization’s overall CAPEX return, both Capital and
However, it should be recognized that the Budget itself is
Operational expenditures need to be tracked and evaluated
only a management tool to help align the strategic focus
against benefits realization. This detailed analysis of budgets,
of the organization. Expenditure above or below this
forecast plans, actual incurred costs and benefits achieved is
budget ‘line’ should be assessed on its merits. The Budget
most effective when based on an integrated single source of
is primarily there to help identify where the variations are
data, your SAP Intelligent Core.

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CONCLUSION

The Capital Expenditure process is one of the most crucial

For more indepth

responsibilities of management to ensure the long-term
success of any organization. Key stakeholders include project
sponsors and executive management, and all participants
articles on CAPEX
and SAP Fiori visit
have a shared interest in accelerating and controlling the
end-to-end process. The goal is the optimal investment of
an organization’s financial and human resources to achieve
its objectives. An effective CAPEX management solution
our blog:
will ensure policy compliance, seamless security and deep
informational content to allow management to make
effective choices efficiently and confidently. Comprehensive
analytics will help the organization inspect and adapt its
processes and outcomes for continuous improvement in Click to read more.
efficiency, control and results.

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 Contact
Us

IQX Business Solutions delivers the leading

integrated CAPEX solution for SAP.

Connect your end-to-end Capital Expenditure

processes to make more timely and confident
business decisions based on a single source of
truth.

Seamless. Integrated. Flexible.

Australia USA
Suite 201, Level 2, 53 Walker St 111 Congress Ave, Suite 400
North Sydney NSW 2060 Austin, TX, 78701
Phone: +61 2 8007 4799 Phone: +1 512 982 3626 E: sales@iqxbusiness.com

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