In this article, Alan Oxley examines the steps that are generally necessary to purchase large assets and some classifications.
Most companies will have a procedure for buying an asset, which is what the term 'capital expenditure' (CapEx) refers to.
This will involve filling out one or more forms and getting this approved by various parties. Your company is likely to have written advice on procedures and forms to use.
Understanding the procedures
Frst of all, therefore, you should make sure you understand your company's policy towards making a CapEx request, as well as the key steps in the process used for getting the request approved. These of course will vary from company to company.
Some large companies have a central administrative unit that is separate from the day-to-day activities of the business, which is taking places at its various sites. Such companies may have a process for those projects taking place at the central unit and another process for those taking place at its sites.
There are usually differences between what the central unit does and what the sites do. For example, any in-house software development may take place only at the central unit.
Irrespective of the size of company, some centralised control of the projects is almost certain to take place.
There needs to be some checking that the department making the CapEx request has budgeted for it. Each project may also be assigned a project code to facilitate its identification and monitoring.
Your company may have flowcharts which show, pictorially, the steps in the processes described above. They may also have examples of businesses cases and the steps that need to be followed for each.
Authorisation often has two stages
There are generally two stages to get CapEx authorised. Firstly, you must get approval for the project to be included on your budget. Secondly, when you are ready to request the funds to commence the project you must apply for these budgeted-for funds.
Your company should have guidelines defining the IT architecture in use, and the types of IT assets that it will allow to be connected to this architecture.
Many IT projects are concerned with making purchases to be used as soon as they are up and running. These can be considered as maintenance projects. In contrast, a company's central unit may develop software for future use.
The budgeting process is likely to be on the following lines:
- The company's central unit issues instructions for the preparation of the CapEx budget. It will describe what information is needed in support of the business case.
- Each department in the company prepares a budget.
- The company's central unit receives the CapEx budgets. It reviews them to check that the instructions it gave the departments have been adhered to. IT projects will have to be signed-off by a senior IT person in the central unit.
As above, getting budget approval does not necessarily mean that the project can go ahead. When you are ready to commence the project you are likely then need to request the funds that you budgeted for.
This involves filling out a form (briefly described below) and getting people to add their signatures. Your company will have guidelines for completing it. The number and seniority of the people needed to sign the form will depend on your company and the amount of money involved.
When you have completed the form and gained IT department signatures, your finance department will usually need to sign it off, and for some companies it will be sent to the CapEx Review Committee.
A department or site will have a threshold amount below which it is free to spend money as it sees fit. This is usually quite low, for example, £800.
Expensive assets are capitalised
Assets have a monetary value and increase the value of the company in some sense. Some items that a company purchases are 'capitalized', that is their monetary value is noted in a special way. Other items are not. Your company will have a threshold amount (for example £800) below which items are not capitalised.
As far as IT is concerned examples of the items from a CapEx that are capitalised include:
- The installation and configuration costs of a new computers and peripherals facility.
- IT equipment such as:
- Expensive computers: servers, high-end PCs;
- Internet working components: routers, etc;
- Bulk purchase of computer equipment (five or more PCs, for example).
Two different sorts of IT capital assets
Your company needs to be able to manage the planning, purchase, and payment of capital assets. As far as IT projects are concerned there are two different types:
- Projects that require assets to be purchased now for a service that is to be put in place at some point in the future. Software development projects fall into this category.
- Projects that require assets to be purchased for use straightaway, that is, to maintain the current business operations. The purchase of any 'off the shelf' products, such as computers, falls into this category.
Companies classify assets into different types
Your company will have a classification for its assets. The classes relevant to IT projects could be, for example, simply 'hardware' and 'software'.
The hardware asset class includes the cost of the hardware, any upgrades made to it, its installation, any accessories, freight costs, and sales tax.
The software asset class includes both internally developed software and purchased software. Internal software costs include the cost for the man-hours spent designing, developing, testing, and deploying it.
Information to support your business case
You will need to provide information in support of your business case. This includes a justification for the project together with a detailed financial analysis. The non-financial information needed to justify the project comprises, for example:
- Project title;
- Description of the present situation;
- Anticipated goals and objectives;
- Description of what you are proposing;
- Benefits of the project;
- Main assumptions that have been made;
- Analysis of any pertinent issues and risks.
For particularly costly projects you are likely to have to go into more detail.
Filling in the forms
The CapEx process usually starts by completing a form that describes what is being requested together with all relevant details. Your company may have different forms for different types of project. For example, a company may have three forms, for use as follows:
- A form to be used for EITHER a project costing more than £13,000 OR
maintenance work costing more than £5,000. - A form to be used for a project costing less than £13,000.
- A form to be used for property purchases.
On the form there will be a space for you to justify the project. This is an executive summary in support of the project.
Example forms
As an aid to explaining the forms, your company may have some completed forms for fictitious projects. Below is an example of the non-financial details for the justification of a project. The example relates to the purchase of new PCs for a classroom in an educational establishment.
Example form: Justifying the business case
Project title: Replacement of PCs
CapEx Project No.:
Date: 06/07/2006
Present Situation
The PCs are over 5 years old. In computing terms this is a long time.
Goal / Objectives
Teach students using PCs that are not outdated.
Proposal
Purchase replacement PCs. The intention is to use models that were released about a year ago. If we were to purchase newly released models the cost would be prohibitive.
Benefits
Students need to use current PCs. We will pass any check made by the Standards body.
Key Assumptions
If we do not replace the PCs soon they will start breaking down. We will be forced to make an instant purchase (costly) and could be without PCs during part of the term.
Issues / Risks
N/A
