Buoyed by the reopening of markets, many industries have witnessed an increase in their capital spending. Morgan Stanley, a leading banking firm, has predicted that investments will soar to a high of 121% of the pre-pandemic levels by the end of next year. According to Morgan Stanley, we're entering a red-hot CapEx (Capital Expenditures) cycle with firms pumping money into machines, factories, and new software.
The Economist revealed in a study that global technology firms have upped their CapEx spending by 42% compared to 2019 levels. Even companies such as Walmart and Target have increased their investments significantly. This is partly in response to changing consumer demands that have been drastically altered due to the pandemic, and partly due to the increasing competition established names are facing from start-ups and new firms. But the payoff from these investments depends heavily on accurate planning and forecasting for the long-term future.
Benefits of having the right tools in place
The CapEx boom signals high levels of optimism in the market. COVID-19 protocols have been removed in many nations and people are taking full advantage of their newfound freedom by splurging. Besides a natural response to pent-up demand, the pandemic also spurred rapid growth in many new industries such as vaccine discovery and work-from-home technologies. Businesses are betting on their long-term futures and expect high returns on their investments. But they also need to set up systems and put tools in place to capitalize on this spending.
If your company is planning to be part of this CapEx boom, make sure you are set up for success by having the right planning software platform (such as Anaplan, IBM Planning Analytics or Workday Adaptive Planning) in place. Spreadsheets are the default tool for all kinds of planning, including CapEx. While spreadsheets are certainly better than nothing, they lack agility if you are looking to compare multiple scenarios with greater ease, reduce turnaround times for reports, and monitor continually performance.
Account for depreciation over the long term
CapEx investments are usually done in assets that depreciate over time. Calculating the depreciation and spreading the cost throughout the useful life period of the asset is an important factor that goes into finalizing capital expenditure.
A planning software platform will automatically calculate depreciation expense determined by input assumptions related to asset type, expected life and in-service date. You will immediately see the effect future depreciation will have on the income statement and get valuable insight into the required tax deductions and long-term profits. You can also play around with different what-if models to understand how the investments pay off in the future.
Assess cash flow impact and financing needs
One of the key decisions to be made when making CapEx decisions is how the investment will be financed. Will it come from the company's funds or will external financing options be used? A key input to making these decisions is understanding cash flow impacts. CapEx models can project cash flows impact and tie directly to your balance sheet forecast in a single integrated model, without having to manage fragile linked spreadsheets that need constant validation.
A platform to compare different investment options
Before signing off on millions of dollars of expenses, businesses conduct in-depth analysis to understand and compare investment options, assess their impact on cash flows, and calculate the expected return. When many such proposals are on the table and time is of the essence, a single planning software platform provides a single place where CapEx plans can be collaboratively collected, modeled, and compared side by side in all aspects.
Measure long term returns of CapEx investments
Once you have modelled your cash flows, depreciation expense and tax impact you have the foundations to project the overall impact of the investment. Since all this is happening in a planning software platform that also has the ability to automatically extract actual data, over time you will also be able to measure and monitor the performance of the investment against plan, and adjust as needed.
The ability to do this reduces risk and enables early identification of problems which increases the probability that they can be addressed. Timeliness is your friend.
The pandemic also brought to light the woeful under-preparedness of industries to tackle material shortages and supply chain bottlenecks. Through strategic investments, these businesses are not just looking to rectify these errors but also find new, lucrative investments.
The impending CapEx boom spells good news for many industries worldwide. With the pandemic behind them, companies are opening up their coffers to look for new investment opportunities.
Equipped with the right tools, organizations can reduce risk as they emerge to boost profits, increase competitiveness, and create new opportunities.