Businesses need long-term view on capital expenditure, says audit analyst

Adjusting the demands of capital expenditure (capex) as Covid-19 runs rampant through companies is sound business sense, as long as rationalising capex is not a knee-jerk reaction.

This is the view of Gary McLean, audit director of Charteris and Barnes in East London.

Capital expenditure is a long-term consideration and hopefully the pandemic will end in the short-term. The Spanish Flu in 1918/19 did, despite its horror impact and companies should not lose sight of the adage that ‘this, too, shall pass’

“Capital expenditure is a long-term consideration and hopefully the pandemic will end in the short-term,” McLean said.

“The Spanish Flu in 1918/19 did, despite its horror impact and companies should not lose sight of the adage that ‘this, too, shall pass’.”

Cost-cutting decisions that involve trimming maintenance or other expenses to a dangerously low level might backfire, said McLean.

However, as market conditions change there might be a need to fine-tune budgets and hopefully not jeopardise the long-term vision. 

“It is strange, but while we hear the sad news of companies going under, many of our clients, particularly in manufacturing, are experiencing the exact opposite — they are flying.”

François Ribeiro dos Santos, a partner at global management consultancy Kearney, said capex should be one of the overarching concerns topping boardroom agendas.

“Rationalising capex is, by definition, a balancing act,” he said. “The key question is can it be rationalised now without sacrificing growth later?

What is the best way to quickly adapt to new conditions and embed agility into portfolio decisions?

“What is the best way to quickly adapt to new conditions and embed agility into portfolio decisions?”

He said irrespective of the industry — from fast-moving consumer goods to asset-intensive industrial sectors — there were probing questions to be asked.

Kearny has developed a five-step “road map” of questions for management to navigate Covid-19.

• In-depth assessment of liquidity levels — how much cash do I have, or how much can I secure?

•  Business fundamentals — what has fundamentally changed?

• Capex portfolio scrutiny — what are the different ways to look at the portfolio?

• Rationalisation and portfolio monitoring — how can I build up the optimal portfolio considering my budget limitations?

• Current view — is there an embed agility and resilience into capex portfolio management?

This year will go down in history as an extraordinarily difficult one for business leaders

“This year will go down in history as an extraordinarily difficult one for business leaders,” Dos Santos said.

“The economic uncertainty has left many wondering how to navigate the coming months and years, as well as how big business is going to stay afloat.” 

Certain capex reductions should be essential.

“By cutting the fat that is restricting growth, you could build agility and resilience, which in turn will help to improve your business growth chances and efficiency.”

He said capex rationalisation was a short-term adjustment to market shocks, while capex optimisation was a mid to long-term enabler of a corporate strategy. 

“Every large corporation at one time or another makes capital expenditures to augment, or at least sustain, their competitive advantages throughout a variety of economic cycles.

“Managing this investment into acquiring, upgrading, and maintaining physical assets is essential to every industry, but it comes with an array of challenges.”

Dos Santos said, without reference to the pandemic, that transforming capex management to maximise the return on investment was a multifaceted undertaking.

But done right, the effort will more than pay off.

“In fact, leading firms that have improved their capex management across the company have seen returns in the range of 10% to 20%.

“This level of transformation can lock in long-term competitive advantages.”