Capex Approval

Capital expenditure can tie up money for years, because equipment, vehicles, buildings and software may promise efficiency or growth but each has upfront and ongoing costs. Capex approval forces a decision before a binding order is placed, and the process should be scaled to the size and risk of the investment.

Begin with the business need by asking what problem the asset solves and what happens if nothing changes, since a machine that is frequently down may need repair, replacement or process redesign, and the request should state the service or production outcome, not just the preferred brand. Build a realistic total-cost estimate that includes price, delivery, installation, training, permits, energy, maintenance and eventual disposal where relevant.

A cheaper machine may consume more electricity or require expensive proprietary parts, so obtain comparable supplier quotes and document assumptions about lifespan. Forecast benefits separately, such as labour hours saved, lower scrap, additional capacity or fewer outages, without counting the same benefit twice in revenue and cost savings, and remember that a machine cannot create customers on its own.

The UK Green Book provides public-sector appraisal guidance on options, costs, benefits and risk, and NHS capital-business-case guidance illustrates formal approval gates. A private business need not copy government thresholds, but it can borrow the discipline of comparing options and recording a reasoned decision, using internal policy for actual authority.

Payback is a simple screen: an asset costing $300,000 that produces a steady $100,000 annual net cash benefit has a simplified payback of three years, although this ignores cash after payback and the time value of money, and if annual benefits vary, add each period's net cash flow until the initial outlay is recovered. Net present value discounts expected future cash flows and subtracts the initial investment, so it can compare options with different timing, provided the assumptions and discount rate are consistent.

Forecasts remain uncertain, so test what happens if demand is lower, costs rise or implementation is delayed. Liquidity matters even when a project looks profitable, because a company may need to pay a deposit months before savings begin, and cash balances, financing cost and working-capital needs should be checked alongside returns.

Risk review should cover delivery, technical fit, safety, cybersecurity and supplier dependence as applicable, including who bears the cost if installation disrupts operations. Check whether the asset needs building alterations or regulatory approval, and make contingency explicit rather than hiding it in an optimistic forecast.

Approval levels can increase with value and risk, so a department head might approve a small replacement within an annual budget while a new site needs board review, and approval of the business case should be separate from authority to sign a contract. Avoid splitting one project into several small purchase orders to evade a threshold, and group related costs, including linked installation or recurring service contracts, when determining who must approve.

After approval, track the project against budget and milestones, and require re-approval if a change of supplier or specification alters the economics. A post-investment review closes the loop by comparing actual cost, timing, output and cash benefits with the original case, finding out whether the forecast, implementation or market changed if savings fell short, and documenting lessons and ownership of fixes, so that the next proposal improves without punishing honest forecasts.