By: Suchismita Dhal --
01 January, 2017
In many organizations, policies for Capex budgeting and approval lack clarity most of the times. This is due to inappropriate assumptions regarding budget preparation and budget review. Also, unclear definition of approval limits, absence of a comprehensive purchasing policy, guidelines on maintaining retention money and bank guarantees are some of the reasons behind lack of clarity.
The major challenge in traditional approach for CAPEX approval and procurement is its long, slow and inefficient process with lapses in planning, multiple approvals, repetitive and recurring processes at different sanction levels. Manual CAPEX approvals also increase the challenges due to manual errors, underutilization or escalation of budget costs due to lack of transparency.
Many companies have a deal committee wherein capital spends above a certain value is reviewed by the committee members. In such cases, the department proposing spend, makes a presentation to the committee in a predetermined format. The expense is approved if the committee agrees with the rationale and the accruing benefits. Generally these activities are taken during budget planning to roll out a workable Capex budget and avoid unbudgeted capital expenditures. Usually, projects greater than $50,000 need a formal documentation with project code and other details along with a cost benefit analysis from the requester. However, it is prudent to keep records for even small scale projects so as to have a better clarity in accounting. Companies are developing and implementing effective policy and procedures which not only help in evaluating the financial returns, quantifying values and risk considerations, but also help in bringing transparency in roles and responsibilities. In the new approach, business unit leaders are responsible for post-capital outcomes and not the project manager.
For implementing centralised CAPEX management process, companies can develop their own models fitting their requirements. However, the success and the sustainability of the policy would highly depend on how well the new policy is knitted into the system.
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