Assume that a company spends US$10 million per year on capital expenditure. The company decides to use its capital as a strategic resource. The aim : to improve financial performance and gain competitive advantage. The company decides to upgrade its capital management infrastructure, by implementing the best systems available. This will provide the required controls for profitable growth.
Targeted value improvements are set at 20% of the annual budget, or US$2 million per annum. This will be achieved without compromising quality.
The strategy requires reinvesting the US$2 million a year saved, into additional capex initiatives with 3 year average payback periods (undiscounted paybacks). These business case projects will support business innovation; increase revenues; reduce operating costs, or reduce working capital.
- Ignore inflation
- Assume a 30% tax rate
- Assume an average project life of 8 years
This strategy will achieve a spectacular but sustainable impact on the company’s financial performance. The graph demonstrates the compounding effect.
(Click here to view graph).
It has been our experience as management consultants that in many organizations, the opportunity exists to gain 20 – 30% better value from capital expenditure programmes.