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In today's resource-constrained environment, the pressure is on to reduce capex and opex. What is inputted today as a capital investment and an asset may have strong future impact on operational efficiencies and return on investment (ROI) figures. While capital planning and capex management are vital functions for growth, it can be hard to find the balance between the within planned deployment schedule to achieve early mover advantage and staying within the approved budget. Cost overruns and schedule delays can turn any capex project into a financial disaster and erode the value of a business case.
The unique position that capex managers hold sometimes require them to make overreaching assessments of capital investments for long-term success. Capex managers are instructed to promote fiscal responsibility while making informed and educated decisions for the organization. As we continuously interact with different functional teams such as fixed assets, accounting, treasury, internal audit and leadership team members, capex managers are in a unique position to identify best practices and spread the word to others who can benefit from it. While working closely with the budget management personnel is important, providing leadership and facilitating cross-functional communication and collaborative interactions to exchange information and ideas, identify and mitigate risks, and deliver solutions for daily issues is essential.
The scope of capex
Capex projects typically are a group undertaking. Though traditionally the bulk of a capex management job has involved tracking, forecasting and reporting, today's capex managers need to be involved in capital planning and budgeting processes from the very beginning to develop a firm grasp of resource requirements and establish bonds with each project delivery team member from an early stage. Tracking, forecasting and reporting always will be important parts of the job, but the capex manager's job should evolve to where we spend 80 percent of our time using the information to drive change rather than just collecting the information.
As field personnel and engineering teams focus on the timely execution and completion of the project, the financial aspects of these projects are not necessarily at the forefront of their minds. In fact, many times technical teams are rewarded on timely deployment of capital projects. That is where we come in. Our role as capex managers is to promote costs awareness, without sacrificing speed and quality.
Particularly in capital intensive industries such as telecommunications, oil refinery, auto, chemical and energy industries, a capital project's financial success impacts the company's ability to achieve cost-structure leadership. With a higher degree of sensitivity to cost savings, capex managers are the main ambassadors to promote the concept of Total Cost of Ownership (TCO) as an essential ingredient to ensure a capital project's financial success. TCO shifts the focus in procuring materials, services and equipment from price to total cost and takes a holistic look at acquisition, ownership and post-ownership costs.(1)
Keeping focus on TCO provides a framework to identify all of the obvious and hidden costs that would have an impact on project's capex and long-term opex success. Maintaining a mental image of the project regarding receiving/booked capex and the project-schedule relationship will help your treasury group anticipate cash requirements. Relationship between booked capex (deliveries of goods and services recognized) and cash capex (money out the door, vendors paid) is a function of payment terms with the vendors. The more streamlined and rationalized these payment terms are, the easier cash capex forecasts would be for treasury team focusing on cash reservoir and working capital considerations.
Making forecasting an ongoing activity for all subject matter experts (SMEs) to reflect changes in the market/budget/spending in real time also helps promote visibility and fiscal responsibility. Core reporting and forecasting revolve around the following equation:
100% Build Forecast = Actuals (Booked Capex) + Open Commitments + Uncommitted Purchases (What is left to open) While having the top-down, mental picture by 100-percent "build view" in place is essential, working bottom-up with on the granular task level enhances overall accuracy in reporting and forecasting. The same bottom-up approach to forecasting also helps capex managers identify cost saving opportunities in certain areas and utilize those savings as shock absorbers to mitigate any unavoidable cost overruns in some other area.
Familiarity with your organization's information systems is another component of effective capex management process. As capex managers rely on, and work with, data coming out of (usually disparate) information platforms, monitoring data integrity and staying alert against system errors and data anomalies are critical factors for forecasting and reporting integrity.
During an effective capex management process, additional cognizance is needed in following areas:
- Scope changes. Monitor what is being built against what was in the original budget. Identify and quantify any out of scope activity, including but not limited to unbudgeted or under-budgeted Items
- Project schedule changes. Unforeseen, beyond-control market realities such as regulatory bottlenecks, jurisdictional hurdles, force majeure or capital constraints
- Schedule and cost Integration. Realistic time-phasing of deliveries and cost needs to align with schedule
- Accurate allocation of costs by task. Stay alert on procurement coding errors, catch them before requisitions turn into purchase orders. Data integrity is critical for reporting and forecasting.
Ground rules needed to ensure team synergy include:
- Installing policy and procedures in place for capitalization, procurement, conflict of interest, etc.
- Maintaining rules of engagement for cross-departmental communication and issue escalations
- Establishing key performance indicators and measuring progress against them
- Assembling "Tool Kits" for tracking and reporting with consistent and easily understood format
- Training staff on such topics as TCO, reporting requirements, forecasting process, procurement policy and procedures, and more.
Sultana Akkan Kassegne is Senior. Manager of Finance for Cricket Wireless.
A longer version of this article appears in the January/February 2011 Exchange.