Ch. No.

03
Capital Expenditure Control

Subject: Enterprise Performance Management

By
Ms. Pooja Karale
 What is Capital Expenditure
❏ Capital expenditure (CAPEX) refers to long-term
investments made by a company to acquire or improve fixed
assets, such as property, equipment, and technology. These
investments are crucial for a company's growth, expansion,
and long-term profitability.

❏ “Capital budgeting is the process of evaluating and

selecting long term investments that are consistent with
the goal of shareholders (owners) wealth maximization”
 Need for Effective Capital Budgeting

➔ Resource Optimization

Capital budgeting ensures that investments are allocated efficiently

to projects with the highest potential return. This minimizes waste
and maximizes the value derived from limited resources.
 Need for Effective Capital Budgeting

➔ Risk Mitigation

By carefully evaluating projects before committing resources,

capital budgeting reduces the risk of investing in ventures with poor
viability or uncertain returns.
 Need for Effective Capital Budgeting

➔ Strategic Alignment

The capital budgeting process aligns investment decisions with the

company's overall business strategy, ensuring that resources are
directed towards initiatives that support long-term goals.
The Capital Budgeting Process: A Step-by-Step Guide

1. Project Identification

Initiate the process by identifying potential projects that align

with strategic goals. This involves gathering input from various
departments and analyzing market trends.
The Capital Budgeting Process: A Step-by-Step Guide

2. Proposal Development

❖ Develop detailed project proposals that outline the project's

scope, objectives, cost estimates, and expected returns.

❖ Include feasibility studies and risk assessments.

The Capital Budgeting Process: A Step-by-Step Guide
3. Project Evaluation

Analyze the proposed projects using various financial techniques, such

as Net Present Value (difference between the present value of cash

inflows and the present value of cash outflows over a period of time)

and Payback Period (amount of time it takes to recover the cost of an

investment) to assess their profitability and financial viability.

The Capital Budgeting Process: A Step-by-Step Guide

4. Project Approval

❏ Present the evaluation results to the relevant stakeholders,

including management and the board of directors, for
approval.
❏ This involves securing necessary funding and establishing
clear project timelines.
The Capital Budgeting Process: A Step-by-Step Guide

5. Project Implementation

Execute the approved projects according to the plan, ensuring

that costs are managed within the budget and the project
stays on schedule. Regularly monitor progress and make
adjustments as needed.
The Capital Budgeting Process: A Step-by-Step Guide

6. Performance Review

Upon completion, conduct a thorough post-implementation

review to evaluate the project's success, actual costs, and
overall impact on the company's performance. Identify any
deviations from the original plan and analyze the reasons
behind them.
 Types of Capital
Expenditure Decisions
Pre-Sanction Control Thoroughly analyze market
of capital
trends, competitor analysis,
expenditure
and customer demand to
1. Market Research understand the project's
potential and its impact on the
company's market position.
Pre-Sanction Control Conduct comprehensive
of capital financial analyses to assess the
expenditure
project's profitability, returns,
and financial viability. Use
2. Financial Analysis
techniques such as NPV and
payback period to evaluate
different scenarios.
Pre-Sanction Control
Identify and assess potential
of capital
risks associated with the project,
expenditure
including technical, financial,
operational, and regulatory
3. Risk Assessment risks. Develop mitigation
strategies to minimize these
risks and ensure project success.
 Pre-Sanction Control Perform sensitivity analysis to
of Capital evaluate how changes in key
Expenditure variables, such as sales revenue,
operating costs, and discount rates,
impact the project's financial
4. Sensitivity Analysis
viability. This helps identify
potential weaknesses and areas
requiring further attention.
Operational Control ❖ Develop a detailed project
of Capital budget, track actual costs
against the budget, and
Expenditure
identify any variances or
overruns.
Cost Tracking and
❖ Analyze the causes of
Budgeting
deviations and take
corrective actions to prevent
further hike.
Operational Control
❖ Regularly monitor
of Capital
project progress against
Expenditure
the established timelines.

❖ Use techniques to
Progress Monitoring visualize and track
project milestones and
dependencies.
Operational Control ❖ Evaluate project
of Capital performance using key
performance indicators
Expenditure
(KPIs) that align with the
project's objectives.
Performance
❖ Regularly review the KPIs
Measurement to ensure that the project is
on track and achieving the
desired outcomes.
Operational Control ❖ Maintain clear
of Capital communication channels
Expenditure among project stakeholders,
including management,
engineers, contractors, and
vendors.
Communication and
Reporting ❖ Regularly provide progress
reports and updates on cost,
schedule, and performance.
 Post Sanction ❖ Conduct a comprehensive
Control of Capital performance review to
Expenditure evaluate the project's actual
results against the initial
objectives and expectations.
Performance Evaluation
❖ Compare actual costs,
revenue, and returns to the
planned values.
 ❖ Identify and analyze any
Post Sanction
variances between the
Control of Capital
planned and actual
Expenditure
results.

❖ Determine the causes of

Variance Analysis deviations and evaluate
the effectiveness of the
original plan and risk
mitigation strategies.
Performance Evaluation Parameters for Projects:

Project Control Process: An Overview

Planning
Establishing a clear baseline plan for project scope,
schedule, and budget

Monitoring
Tracking project progress and performance against
established metrics.
Performance Evaluation Parameters for Projects:
Project Control Process: An Overview

Controlling
Identifying variances from the baseline plan and taking
corrective action.

Reporting
Communicating project status and performance to
stakeholders.
Performance Evaluation Parameters for Projects:

Setting the Baseline Plan

❏ Scope

Defining the specific deliverables, tasks, and objectives

of the project. This involves breaking down the project
into manageable components and ensuring that all
stakeholders agree on the scope.
Performance Evaluation Parameters for Projects:

Setting the Baseline Plan

❏ Schedule

Creating a realistic timeline for project completion,

including task durations, dependencies, and milestones.
This involves considering resource availability,
potential delays, and other factors.
Performance Evaluation Parameters for Projects:

Setting the Baseline Plan

❏ Schedule

Creating a realistic timeline for project completion,

including task durations, dependencies, and milestones.
This involves considering resource availability,
potential delays, and other factors.
Performance Evaluation Parameters for Projects:

Setting the Baseline Plan

❏ Cost

Developing a detailed budget for the project, including

labor, materials, equipment, and other expenses. This
involves estimating costs accurately and allocating
resources effectively.