Why CapEx planning deserves special attention
Operating expenses are flexible -- you can adjust most of them within a quarter. Capital expenditure is different. When you commit to a new office fit-out, a server infrastructure upgrade, or a major software implementation, the cash leaves the business and the asset sits on the balance sheet for years. Getting CapEx wrong has long-term consequences that OpEx mistakes rarely do.
For CFOs, CapEx planning is where financial discipline meets strategic ambition. Every capital request is a bet on the future of the business.
The CapEx planning framework
1. Build a project register. Every potential capital project should be logged in a single register with a standard set of fields: project name, sponsor, estimated cost, expected useful life, business justification, and requested timeline. This register becomes the single source of truth for CapEx decisions.
2. Categorise projects. Separate maintenance CapEx (replacing worn-out assets, keeping the lights on) from growth CapEx (new capacity, new capabilities). Maintenance CapEx is largely non-discretionary. Growth CapEx is where the strategic choices live.
3. Apply investment appraisal. For material projects, run the numbers properly. Net present value (NPV), internal rate of return (IRR), and payback period are the standard tools. For UK businesses, remember to factor in capital allowances -- the Annual Investment Allowance currently provides 100% first-year relief on qualifying plant and machinery up to £1 million.
4. Prioritise within an envelope. Set a total CapEx budget based on what the business can afford -- considering cash position, debt covenants, and shareholder expectations. Then rank projects within that envelope. Not every good idea gets funded in the same year.
Timing and cash flow
CapEx hits the cash flow statement when the cash is paid, not when the asset is depreciated. A £500,000 project with a five-year depreciation schedule still requires £500,000 of cash upfront (or within the payment terms). Your cash flow forecast must reflect the actual payment schedule, not the P&L impact.
For large projects, map out the payment milestones: deposit, progress payments, final payment, and retention. This level of detail is essential for accurate cash flow planning.
Approval governance
Establish clear approval thresholds. A common structure for mid-sized businesses:
- Under £10,000: department head approval
- £10,000 to £50,000: CFO approval
- Over £50,000: board approval
Every approved project should have a named owner responsible for delivering it on budget and on time.
Monitoring and post-completion review
CapEx planning does not end at approval. Track actual spend against budget monthly. For major projects, conduct a post-completion review: did the project deliver the expected benefits? Was the cost estimate accurate? These reviews build institutional knowledge that improves future CapEx planning.