WHAT IS CAPEX? CAPEX BASIC INFORMATION AND TUTORIALS

What is CAPEX?

Short Answer
CAPEX stands for ‘Capital Expenditure’ and represents the amount of money spent for investments carried out from a long-term perspective.

Through the production process, fixed assets are used up. The annual depreciation charge is supposed to reflect this wearing out. By comparing capital expenditure with depreciation charges, you can determine whether the company is:

• Expanding its industrial base by increasing production capacity. In this case, capital expenditure is higher than depreciation as the company invests more than simply to compensate for the annual wearing out of fixed assets.

• Maintaining its industrial base, replacing production capacity as necessary. In this case, capital expenditure approximately equals depreciation as the company invests just to compensate for the annual wearing out of fixed assets.

• Under investing or divesting (capital expenditure below depreciation). This situation can only be temporary or the company’s future will be in danger, unless the objective is to liquidate the company.

Comparing capital expenditure with net fixed assets at the beginning of the period gives you an idea of the size of the investment program with respect to the company’s existing production facilities. A company that invests an amount equal to 50% of its existing net fixed assets is building new facilities worth half what it has at the beginning of the year. This strategy carries certain risks:

• that economic conditions will take a turn for the worse;
• that production costs will be difficult to control (productivity deteriorates);
• technology risks, etc.

The theoretical relationship between capital expenditures and the cash flow from operating activities is not simple. New fixed assets are combined with those already on the balance sheet, and together they generate the cash flow of the period.

Consequently, there is no direct link between operating cash flow and the capital expenditure of the period.

Thus, comparing cash flow from operating activities with capital expenditure makes sense only in the context of overall profitability and the dynamic equilibrium between sources and uses of funds.

The only reason to invest in fixed assets is to generate profits, i.e. positive cash flows. Any other objective turns finance on its head. You must therefore be very careful when comparing the trends in capital expenditure, cash flow, and cash flow from operating activities. This analysis can be done by examining the cash flow statement.

Any investment strategy must sooner or later result in an increase in cash flow from operating activities. If it doesn’t, then the investments are not profitable enough.

Be on the lookout for companies that grossly overinvest, despite their cash flow from operating activities not growing at the same rate as their investments. Management has lost sight of the all-important criterion that is profitability.

All the above does not mean that capital expenditure should be financed by internal sources only. Our point is simply that a good investment policy grows cash flow at the same rate as capital expenditure.

This leads to a virtuous circle of growth, a necessary condition for the company’s financial equilibrium, as shown in graph (a) of Figure 1.5 below. Graphs (b), (c) and (d) of Figure 1.5 illustrate other corporate situations. In (d), investment is far below the company’s cash flow from operations.

You must compare investment with depreciation charges in order to answer the following questions:

• Is the company living off the assets it has already acquired (profit generated by existing fixed assets)?

• Is the company’s production equipment ageing?

• Are the company’s current capital expenditures appropriate, given the rate of technological innovation in the sector?

Naturally, the risk in this situation is that the company is ‘resting on its laurels’, and that its technology is falling behind that of its competitors. This will eat into the company’s profitability and, as a result, into its cash flow from operating activities at the very moment it will mostly need cash in order to make the investments necessary to close the gap vis-`a-vis its rivals.

The most important piece of information to be gleaned from a cash flow statement is the relationship between capital expenditure and cash flow from operating activities and their respective growth rates.

Lastly, ask yourself the following questions about the company’s divestments. Do they represent recurrent transactions, such as the gradual replacement of a rental car company’s fleet of vehicles, or are they one-off disposals?

In the latter case, is the company’s insufficient cash flow forcing the company to divest? Or is the company selling old, outdated assets in order to turn itself into a dynamic, strategically rejuvenated company?

THE SALES FORECAST BASIC INFORMATION AND TUTORIALS

The key input to the short-term financial planning process is the firm’s sales forecast. This prediction of the firm’s sales over a given period is ordinarily prepared by the marketing department.

On the basis of the sales forecast, the financial manager estimates the monthly cash flows that will result from projected sales and from outlays related to production, inventory, and sales. The manager also determines the level of fixed assets required and the amount of financing, if any, needed to support the forecast level of sales and production.

In practice, obtaining good data is the most difficult aspect of forecasting. The sales forecast may be based on an analysis of external data, internal data, or a combination of the two.

An external forecast is based on the relationships observed between the firm’s sales and certain key external economic indicators such as the gross domestic product (GDP), new housing starts, consumer confidence, and disposable personal income.

Forecasts containing these indicators are readily available. Internal forecasts are based on a consensus of sales forecasts through the firm’s own sales channels. Typically, the firm’s salespeople in the field are asked to estimate how many units of each type of product they expect to sell in the coming year.

These forecasts are collected and totaled by the sales manager, who may adjust the figures using knowledge of specific markets or of the salesperson’s forecasting ability. Finally, adjustments may be made for additional internal factors, such as production capabilities.

Firms generally use a combination of external and internal forecast data to make the final sales forecast. The internal data provide insight into sales expectations, and the external data provide a means of adjusting these expectations to take into account general economic factors. The nature of the firm’s product also often affects the mix and types of forecasting methods used.

DIFFERENCE BETWEEN STRATEGIC AND OPERATING FINANCIAL PLANS BASIC INFORMATION AND TUTORIALS

LONG-TERM (STRATEGIC) FINANCIAL PLANS
Long-term (strategic) financial plans lay out a company’s planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years.

Five-year strategic plans, which are revised as significant new information becomes available, are common.

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both, tend to use shorter planning horizons.Long-term financial plans are part of an integrated strategy that, along with production and marketing plans, guides the firm toward strategic goals.

Those long term plans consider proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing.

Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts; and any planned acquisitions.

Such plans tend to be supported by a series of annual budgets. The Focus on Ethics box shows how one CEO dramatically reshaped his company’s operating structure, although it later cost him his job.

SHORT-TERM (OPERATING) FINANCIAL PLANS
Short-term (operating) financial plans specify short-term financial actions and the anticipated impact of those actions. These plans most often cover a 1- to 2-year period.

Key inputs include the sales forecast and various forms of operating and financial data. Key outputs include a number of operating budgets, the cash budget, and pro forma financial statements.

Here we focus solely on cash and profit planning from the financial manager’s perspective. Short-term financial planning begins with the sales forecast. From it, companies develop production plans that take into account lead (preparation) times and include estimates of the required raw materials.

Using the production plans, the firm can estimate direct labor requirements, factory overhead outlays, and operating expenses.

Once these estimates have been made, the firm can prepare a pro forma income statement and cash budget. With these basic inputs, the firm can finally develop a pro forma balance sheet.

THE SEVEN MANAGEMENT HATS BASIC INFORMATION AND TUTORIALS

Making a transition to management requires understanding the basic functions of the manager. Below shows the manager’s work from seven basic perspectives—the seven management hats.



The seven management hats.
ADMINISTRATION HAT—managing the nuts and bolts
DIRECTION HAT—teacher, coach, promoter, and innovator
LEADERSHIP HAT—taking the lead
PEOPLE HAT—understanding human behavior
ACTION HAT—the hands-on work
HIGH-ANXIETY HAT—the challenging work
BUSINESS HAT—where it all comes together


Three hats describe the indirect workload and include administration, direction, and leadership. Four other hats describe the direct workload and include the people hat, the action hat, the high-anxiety hat, and the business hat.

On your first day as a manager, you’ll have administrative work that must be completed, you will provide direction to some of your people, and you will probably be expected to take the lead on some issue.

You will have interaction with different kinds of people behaviors, there will be some challenging work, you may need to resolve a serious conflict, and you may be involved in activities at the organizational level that require putting on the business hat.

This situation will continue as long as you remain in a managing position. As you become involved in the managing process you will recognize that you may change these hats many times during a typical workday.

So let’s look at these seven hats that managers wear, the expectations that go with them, how the expectations change as the occasion demands, and how managers develop an appropriate balance.

THE LEADERSHIP HAT: TAKING THE LEAD

Leadership is the third component of managing. There are those who make a distinction between managing and leading. While leadership is vital, it is only one part of the management process. Leadership doesn’t work in isolation to meet organizational objectives.

Keep in mind that we’re considering leadership as it applies to the in-development manager. Rather than trying to define leadership, let’s consider leadership as taking the lead.

Leadership involves pathfinding; it involves defining where the organization is going and what it wants to be; it involves looking into the future; it involves going beyond the traditional opinions and rituals and it is not jumping on the bandwagon of the latest management guru.

So here is a list of attributes that apply not only to the entry-level manager but to all managers:

❑ Accept responsibility and accountability. The rose must be pinned on someone. There can be no scapegoats; you are the manager and you are accountable. You can’t blame your people for nonperformance. It’s not easy when some person fails to perform, but you were there; it was your responsibility.

❑ Don’t kill the messenger. Bad news will arrive and you need to deal with it. Although bad news is difficult to accept, if it is accepted immediately it creates a minimum negative impact. Time really is of the essence.

❑ Make judgments based on an acceptable level of facts. Leaders can’t wait until all the facts have been accumulated. Some minimum amount of information is required. The rest is judgment. All the available sophisticated models, simulations, and computer programs may or may not help in making the decision.

❑ Make the complex simple. Make the complex easy to understand. The essence needs to be communicated. This is easier said than done since simplifying requires a great deal of disciplined thinking. But any issue that cannot be drawn down to its simplest essentials probably isn’t understood.

❑ Follow through with clear decisions. Eliminate any hidden meanings. The decision may not be acceptable, but it must be understood. Acceptance involves understanding the impact of the decision and the implications of the decision on operations.

❑ Challenge the so-called experts. Experts have their place, but they also have their agendas. They may be experts of the past and not focused on the future. Their past experience and knowledge may or may not be useful. Above all be cautious of the single-issue experts who promote their panaceas.

❑ Develop a proactive philosophy. Leaders exhibit a proactive stance. It’s too late to become proactive when the emergency arises. That emergency may have been avoided if someone had listened or someone had opened their eyes to the world around them. Anticipate future problems. Don’t wait to be told what to do.

❑ Obsolete the present before its time. It’s difficult to obsolete products, processes, and activities that at one time provided significant benefit. It’s more difficult to obsolete thinking that no longer adds value. It takes courage to eliminate those great contributions made by some person now in upper management. Timely obsolescence prevents future crises.

❑ Promote a positive attitude. Look for solutions, not scapegoats. Blame only creates discord and destroys relationships. It doesn’t solve problems. Those responsible must be held accountable, but the problem requires a solution. Focus on resolving the problem.

THE DIRECTION HAT: TEACHER, COACH, PROMOTER, INNOVATOR

In providing direction, managers integrate knowledge, skills, attitudes, personal characteristics, and experience of the unit into an effective and efficient team. Providing direction involves managing the assigned and available resources within the limits of the organizational infrastructure.

The resources include people, intellectual property, information, organizational attributes, technology, time, customers, suppliers, plant and equipment, facilities, and financial.

The organizational infrastructure includes purposes, objectives, strategies, organizational structure, guiding principles, policies and practices, management attitudes, management expertise, support for innovation, acceptance of risk, communication, and social responsibility.

Integrating the available resources within the organizational unit’s culture includes many different managerial activities, as shown below:


Focusing
Communicating  Teaching  Pulling
Integrating  Training  Analyzing/Synthesizing
Monitoring  Coaching  Negotiating
Motivating  Pushing  Promoting


This list may lead youto believe that becoming a manager involves more than could be expected of any human being. But a close look at the list shows that in our personal lives we already demonstrate some of these competencies but under different circumstances.

Focusing on the following activities in meeting objectives allows you to develop a competent staff that meets current as well as future requirements. In the process you provide opportunities for growth. Focus the group but provide the flexibility when required.

❑ Communicating up, down, laterally, within, and outside the organization—verbal, written, graphic, reading, and listening is critical. One size does not fit all. The message must meet the needs of the listener.

❑ Integrating the multifunctional interests of the group is important. The disciplinary silos need to be brought  together. Integrate the activities of various participating disciplines in the very early stages of a project or program. Track requirements and the performance so as to avoid future costly rework.

❑ Progress cannot be monitored from the office. Instead of only a show-and-tell try a show-and-tell-and see-and-feel approach. Whether the work requires creative thought that ends in a document or a design that involves a product, take the time to view the physical results. Adopt a show-me attitude.

❑ Motivating individuals and groups is essential. But be cautious about using the motivational gurus; their impact lasts about 48 hours. Find a way to unlock individual self-motivation. This can usually be accomplished by developing an environment that lives on self-motivation. Most people do an acceptable job when given an assignment, but the self-motivated find the assignment and pursue it with a passion.

❑ Teaching is part of the manager’s role. Teaching is not micromanaging. Everyone doesn’t have to start at the bottom of the learning curve. You have experience (intellectual property), and you should pass it on and then allow your people to make new mistakes and learn from them and communicate them to others.

❑ Training determines the future of your unit. Experience is a great teacher but a little education can save a\ lot of time, effort, cost, and frustration. The cut-and-dry method can work with simple one-dimensional problems but most problems are more complex and require multidisciplinary knowledge.

❑ Coaching applies to both the discipline side and the performance side of the person. Discipline competence (the hard skills) is insufficient: it must be augmented by what most consider soft skills; I prefer to refer to them as integrating skills. The skills that make the discipline competence possible are the ones that involve working with people.

❑ Pushing some people to accomplish their goals is necessary. People who require continual attention and stroking need to be weaned from such behavior because it is not only detrimental to the performance of the group but also to the person who becomes the focus of unnecessary attention.

❑ Pulling is quite different from pushing. Helping a person through the difficult stages of a project either by providing input directly or from other sources builds confidence and trust. The manager who puts the person on the right path gains respect and at the same time helps move the project toward completion.

❑ Analyzing without synthesizing provides only half the answer and often leads to indecision rather than action. Synthesis involves bringing information from all those analyses and integrating them to reach an acceptable decision. Too much analysis leads to paralysis.

❑ Negotiating requires the ability to know when to change course. Everything is supposedly negotiable, but how far? Win–win may be a good concept but the fundamentals of any discipline cannot be disregarded. Too much compromise can lead to future problems. It’s better to start over and look for new solutions.


❑ Promoting, while not in the vocabulary of most professionals and young managers, becomes a vital skill. New ideas, concepts, and proposals that deviate from traditional practices require salesmanship. Acceptance of anything new generates some conflict, as it should. The proponent makes the case and the decision makers react. Questions will be asked so you need to do your homework.

THE ADMINISTRATION HAT: MANAGING THE NUTS AND BOLTS

Doing administrative work is generally not considered to be the most exciting role of a manager unless by chance you receive some great satisfaction from dealing with routine details.

The claim that there’s not much room for creativity depends on whether you accept the status quo or decide that there must be a better way to accomplish those routine tasks.

The objective is to move the paperwork through the paper mill, which has become a combination of paper and some form of electronic communication.

This is the grunt work: the work that most professionals and managers despise, but doing it is not a choice.

The paperwork essential for running an effective organization must flow efficiently through the system: policies and procedures and certain requirements must be met.

Reports must be written but you must ask if they really serve a purpose.

Expense vouchers need to be approved. The paperwork involved in hiring, evaluating, promoting, reassigning, and possibly dismissing personnel must be processed. Meetings need agendas.

All administrative processes must be updated. Interfacing with other functions becomes imperative. In addition, certain

DEVELOPING YOUR APPROACH TO MANAGING BASIC INFORMATION AND TUTORIALS

What kind of an organizational unit will you build—proactive, reactive, or inactive? There really is only one choice: proactive. Reactive units are always playing catch-up to the competition. Inactive units, meaning those that do not even react to the environment, should not be allowed to exist.

Keep in mind that all organizations face internal and external competition. This applies to academia, government, industry, and not-for-profit organizations.

A proactive organization of any size and in any function pushes the envelope in every discipline to the extent required to develop its competitive advantage. Members of the group are not only cognizant of the leading edge activities in their discipline but know when and how to implement them.

They use all of the available resources at their disposal to their advantage. They build the organization by developing high levels of individual competency that translate into organizational capability. By pushing the future they build a sense of professional excitement that becomes invigorating and contagious.

Why an emphasis on building a proactive organizational unit? Can you really achieve any personal satisfaction from working in an organization that only reacts to its competitors? Losing the game is hardly a motivator.

It is possible to build a proactive attitude in an organizational unit that provides a continuous flow of creative ideas and in the process builds a sense of excitement. It’s only necessary to develop an environment that allows for socialization and the free flow of information and ideas on improving work methods and performance.

Our current levels of sophistication too often defer our attention from some very basic principles like simplifying work methods, using the appropriate tools, considering organizational and people relationships, and above all placing people in positions where their strengths provide the greatest benefit to the organization and at the same time provide opportunities for career growth.

The following guidelines help build a proactive organizational unit:

❑ Set the goals. As manager you and your staff set the goals but you take the lead. You define what you want the unit to be (some like to call this vision). You become the role model. People will take their behavioral cues from you.

❑ Meet project requirements. Meet the three project requirements: performance to specifications, on time, and at cost. Whether or not these requirements are met depends on you as the manager.


❑ Propose new projects. Only doing what is assigned is not a sufficient challenge for you and your staff. Most people have more to give than what’s expected and it’s this opportunity to propose new projects that keeps them and the organization vital.

❑ Develop high standards of professionalism. It’s easy to become satisfied with past performance. Yesterday’s performance may not be adequate today. You cannot allow your professionals to continue to survive with what they learned as students.

❑ Take calculated risks. How much risk will you take and how much will you allow your people to take There are always risks associated with suggesting some new activity, with suggesting some new approach that goes against traditional thinking, with questioning senior authority. But remember the adage: no risk, no reward.

❑ Foster innovation. This may be your number one responsibility. Organizations cannot survive without innovation. Competition is real. Fostering innovation can only come from developing a culture that provides the freedom of action with operational discipline.

❑ Develop a mental discipline. Managing is about solving problems and searching for opportunities. The processes of thinking, clarifying issues, considering the pros and cons, sorting alternatives, and making decisions require a disciplined structure. Those decisions may be made on the elevator ride or during a casual encounter but need to be guided by a disciplined process.

❑ Make timely decisions. There is nothing more frustrating than waiting for a decision. How many times have you been asked as a professional to supply more information and then more information and more information? Don’t inflict this frustration on those people that work with you.

❑ Create dissonance. Welcome the constructive mavericks. Neutralize or eliminate any destructive forces.

As a final reminder, don’t fall into the trap of acting like the new kid on the block; you may be, but you’re a manager now. Don’t let anyone convince you to take it slow but also don’t enter with the force of a bull in the china shop.

If you were appointed on Friday afternoon you’ve had the whole weekend to put together a rough outline of how you’re going to manage. What you bring to the table Monday morning will set the stage for the future. You are now responsible for the results of others. Do you provide the leadership or do you allow others to direct the future?

MANAGING WITHIN A CULTURE BASIC INFORMATION AND TUTORIALS

No research is required to demonstrate that people are an organization’s greatest asset and that organizational culture determines performance. Success in any organization comes from assembling a critical mass of people in the required disciplines and creating a culture that supports the group of unique individuals with all their foibles and idiosyncrasies.

So what is organizational culture? In my previous book,3 I described organizational culture as: ‘‘including the shared values, the beliefs, the legends, the rituals, the past history, the intellectual and operational traditions, the pride in past accomplishments, the policies and practices, the rules of conduct, the organization’s general philosophy of operation, and other artifacts that define the organization.’’

There are two parts to this description: the behavioral and the emotional. The behavioral aspects of an organizational culture include shared values, beliefs, intellectual traditions, policies and practices, rules of conduct, and philosophy of operation.

The emotional aspects include the legends, rituals, past history, and pride in past accomplishments. While the behavioral elements may be granted greater significance because they are measurable, the emotional elements add the ingredients that generate the spirit and passion of the organization.

Organizational cultures span a continuum from the overcontrolled to the overpermissive. Overcontrolled cultures limit creativity and innovation, and overpermissive cultures seldom provide a sustaining organization.

As practitioners in managing we know that most people need some level of control and relatively few can function effectively with total freedom. The manager’s job is to balance control and freedom to the group and also to the individuals within the group.

Most discussions about culture focus on the macro-organization’s culture, but the most important culture is the culture that you as a manager develop for your specific group. The organization will most likely promote a stated culture but the culture you develop for your group will depend on your needs, the activities and expectations assigned to your group, and the competencies and attitudes of the people.

While senior management may promote creativity and innovation we would question just how much and how often we’d want creativity and innovation in the finance department. We’d question just how many productive mavericks should be in the payroll department.

We have seen in recent years the disasters created by creative accounting. However, if you’re managing a research, development, or marketing function, creativity and innovation may be the number one priority.

This does not suggest that any organizational function can eliminate creativity and innovation from its vocabulary, but each function will need creativity and innovation of a different type, on a different scale, and guided by different principles. So although the organization may have principles that define its culture, you will develop a culture based on your people and your vision and direction as a manager.

DIFFERENCE BETWEEN MANAGEMENT AND MANAGING

Management as a practice is part of ancient history, but management as a discipline is a mid-twentieth century invention. A review of the literature will find many descriptions for the activity we call management. The word management used as an impersonal inclusion of some unidentified body of decision makers has no meaning.

Managers are part of management and thus responsible for results through managing. Management also includes a body of knowledge and is a discipline that has theories, although they are not governed by the laws of science.

Research results from the academic community provide the manager with new insights to be used in the process of managing. While those insights may not be fully quantified they need to be explored for the hidden gems.

Peter Drucker in The Essential Drucker2 asks the question: ‘‘Is management a bag of techniques and tricks?’’ It appears so after scanning the books and periodicals from the academic and business press that focus on techniques and tools for managing.

But management is more than tools and techniques—it’s a body of knowledge that supports the act of managing. Managing could be described as applying the theories of management. But that description lacks specificity; theories are applied to what, and for what purpose?

Managing has also been described as being responsible for the work of others. True, but not sufficiently inclusive. Managing is about people—how to develop skills and competencies that meet the needs of the organization and provide opportunities for personal growth.

For our purposes, consider managing as the practice, the art, and the act of doing. Responsible managers meet the organization’s objectives and fulfill their commitment to the organization by managing. To restate Drucker’s deschuman beings.

Its task is to make people capable of joint performance, to make their strengths effective and their weaknesses irrelevant. My emphasis throughout this book will focus on expanding the position from which the manager views the function of managing. Managing involves more than meeting the objectives for your group; managing also involves guaranteeing that meeting your objectives is in consort with the objectives of other groups.

This applies to those involved in academia, government, or industry. You need to be able to communicate effectively and understand each other. As a manager your scope of operations expands and your actions and decisions impact other groups.

If you’re a manager in marketing or sales, youneed to understand some level of the technology involved in order to communicate effectively with customers. If you’re a manager in the finance department, you’re not simply a bookkeeper; you should provide insight, establish guidelines, and look for ways to find the workable financial solutions.

You are managing part of the organizational resources and those resources include not just people and money but also the intellectual property, technology, time, distribution channels, customers, suppliers, production capability, operating facilities, finance, and all external resources.ription: Managing is not a bag of tools, techniques, and tricks; it is about