Capital Expenditures Add Value Under the Right Circumstances
November 13, 2018
We are always on the lookout for ways to provide additional value to our customers. But we also like to balance the books and make an honest profit. Capital expenditures can help do both – but only after a thoughtful and thorough cost analysis process.
The first item to consider when making a capital expenditure is the current economic and financial operating environment. Recent changes to the federal tax laws have proven to be a huge incentive for companies of our size to invest in capital equipment to expand operations. Normally, spending on business assets is capitalized and depreciated so that the expense is spread out over several years. Accelerated depreciation legislation incentivizes companies to invest in large capital equipment and immediately expense it the year the equipment is placed into service.
Crunch the Numbers Carefully
Even if the economic environment is right, it’s still vitally important to make sure you’ve gone through the proper cost analysis of the potential investment. One important thing for us is to optimize our revenue per square foot in our manufacturing space. Another is to ensure the proposed asset purchase will generate a positive Net Present Value. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Simply put, a positive net present value means a better return for us over the life of an asset.
When we’re considering a large asset purchase, we make a series of calculations based on many variables to confirm the projected ROI, IRR and NPV before proceeding.
Maximum Utilization of Space and People
Our best ROI calculations often factor gains in production square footage. We often ask ourselves, are there investments that allow us to open up additional areas throughout the plant to potentially layer in more machines or add additional lines?
Another piece of the puzzle that sometimes gets overlooked is the impact on our employees. Is this investment going to allow us to redeploy several employees into other areas of the business because their current department is going to be more automated? Will the time needed to prepare a job for shipment drop? Will a repetitive and time-consuming process be eliminated? If an investment allows us to cut back on the labor necessary to undertake a function, that is value-added for us and our customers. It’s important to point out that this does not mean jobs are eliminated; but redistributed throughout our enterprise for maximum efficiency and productivity.
Return on Investment
Careful investment of capital into productive assets allows us to continually grow our business. Our workforce learns to operate state-of-the-art equipment. It also ensures that we put the finest technology available to work for our customers. For them, that means even faster turnarounds and higher levels of quality at a fair price. If you do your homework, capital expenditures can be a great way to expand your operations.