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Measuring CapEx performance – why it matters and how to do it

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HSBC UK’s latest CapEx survey showed that over half of small businesses were unsure when it came to measuring how well their capital expenditure was performing. Lee Hancox, Head of Business Banking & Corporate Equipment Finance, explains why it’s so important and how to build it into your business.

We all know that information is power, and when it comes to understanding the return you’re getting on your business investment, measuring how well your capital expenditure (CapEx) is performing against the plans you’d set out for it can help your business make the most of that investment.

“While many smaller businesses have a rationale for capital expenditure, that’s not the same as setting some performance measures and goals,” says Lee Hancox, Head of Business Banking & Corporate Equipment Finance at HSBC UK. “In manufacturing for example, it may be obvious that a new machine may be faster, more efficient or offer higher levels of automation and so on, but without trying to quantify at the outset what you expect those improvements to be, it becomes difficult to see if the expected outcomes have been met.

“If there are clear measures put in place, then it’s far easier to calculate a return on the investment made. This can then steer future CapEx in a more positive direction with improved returns.”

Once there is an established process in place to measure CapEx , it can be used to determine the viability of future investments. This will help ensure less speculative expenditure with a more focussed approach with a firm outcome determined.

LEE HANCOX | HEAD OF BUSINESS BANKING & CORPORATE EQUIPMENT FINANCE AT HSBC

nforming decisions

It may also be worth considering performance in a broader sense, says Lee, pointing out that if the machine you invest in produces items more quickly, but this increased capacity creates a bottleneck further along the production line, then overall performance might be hit – understanding why and where that happens can help decide future investment strategy. In addition, when it comes to looking ahead, Lee says:

“Once there is an established process in place to measure CapEx , it can be used to determine the viability of future investments. This will help ensure less speculative expenditure with a more focussed approach with a firm outcome determined.”

Supporting sustainability

The increasing importance of sustainability is seeing a growing number of businesses creating net zero targets and committing to a greener future. It’s an area that smaller businesses need to be thinking about and may require many to start looking at measurement and reporting more closely.

“Increasingly, businesses are expected to demonstrate their plans to reduce waste and carbon emission,” says Lee. “While smaller companies may not be seeing this at present, large corporates are already coming under scrutiny and will inevitably want data from their supply chains as we move forward. Having an idea where you are now and how CapEx can improve that position will absolutely require demonstrable measurement.”

The barriers to measurement

When it comes to the barriers small businesses face in measuring CapEx performance, Lee points out that they can be varied and understandable. “I’ve spoken to some businesses where it has simply just never occurred to them to have relevant measures in place to ensure their expectations are met. They have an understanding that they can afford to fund the expenditure and that the investment will increase productivity, for example, but they’ve never thought to consider all of the potential other aspects and the actual improvement in cashflow or the bottom line.”

The more common issue, however, is lack of time or resource. “Measuring CapEx performance isn’t necessarily straightforward, and many aspects of the investment need to be considered,” explains Lee. “For example, investing in newer, more energy efficient technology may offer identifiable and quantifiable savings in energy bills, but this has to be considered alongside the actual cost of purchase, impacts on cashflow, potential production downtime during installation & commissioning, training costs and many others.

“Where larger companies may have planning groups to manage that, smaller businesses may well have just one or two people trying to take responsibility for many aspects of the purchase such as funding, logistics, overhead reporting, accounting & taxation. Similarly, many owner-run businesses are absolute experts in the product or service they sell, but not in measuring all these aspects.”

How can businesses overcome these challenges?

While individual businesses will have different metrics or needs when it comes to measurement, there are some things that all businesses should consider, says Lee.

These are:

  • Consider what the CapEx is trying to achieve. This can mean at individual asset level, but also the wider objectives such as improving cashflow, reducing overall production times, improved customer service or product quality.
  • Try and quantify all of the expected benefits and don’t be afraid to identify and track possible negatives so they can be minimised or negated.
  • Think about what metrics will best identify if your intended goals have been met.
  • Set a timeframe for review.

How to make measurement work for your business

When it comes down to ways of measuring, Lee explains that using a range of metrics and also adapting these depending on the type of project, can be useful. “In the example of a transport company buying a new HGV, for example, it may be that at asset level, metrics like fuel efficiency are fairly easy to establish before the purchase and to monitor once deployed. Expected servicing costs & associated downtime based on mileage would also be fairly simple. Other aspects should also be considered alongside this, such as cashflow, potential funding costs, insurances, interest and taxation.

“If you’re thinking about a software system, on the other hand, the metrics could potentially be vastly different. It may even be that a process review of current systems could be used to establish a baseline time from order to dispatch, manual touch points, ease of use, flexibility etc. That way measuring improvements in process time, staff productivity, improved financial reporting may also be a focus.”

A lifetime approach

Nor should the measurement be seen as a one-off, he says. “If we take the example of the HGV, it would be safe to assume that the comparative fuel efficiency would drop over a period of years, servicing costs would increase as would downtimes for repairs etc. It would, therefore, be potentially misleading to put metrics in place that just allowed one snapshot in time after six or 12 months.”

That lifetime approach can also help inform the optimal time for your business to undertake additional or replacement CapEx and can feed into your overall business planning cycle.

For more information about how you can make CapEx work harder for your business, please speak to your Relationship Manager.

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