Written by: Richard Frykberg

The goal of Capital Expenditure Management (Capex) is to help organizations achieve their strategic objectives sooner, at lowest cost and least risk. To succeed and prosper organizations must continuously reinvest in their operational capacity, technology, products, and processes. Planning, budgeting, and forecasting activities help executives make better informed capital expenditure management decisions, optimize resource allocation, and navigate economic uncertainties with greater confidence.

This article provides a comprehensive overview of effective capital expenditure management within SAP and explores how you can seamlessly connect your capital expenditure requests (CER’s) with upstream capital budget items and downstream investment measures (projects).

Capital Expenditure Requests

Most organizations employ Capital Expenditure Request (CER) or Authorization for Expenditure (AFE) forms to gain approval for capital procurement. Due to the long-term impact, high value, and significant risk associated with capital purchases, these requests are typically subject to executive review and approval in accordance with the organization’s delegation of authority policy. For very high-value commitments, executive management may not have sufficient approval authority, and approval by the board of directors or shareholders may be required. Approval of capital expenditure requests is contingent on funding capacity, validated with reference to the budget, and confidence of benefit realization, contingent on the quality of the business case and expenditure control measures.

Capital Expenditure Budgeting

Capital investments consume time and financial resources in their implementation, but are expected to deliver ongoing growth, savings, or risk mitigation benefits. To enable an organization to factor in the impact of these investments on their operational activities and expected financial results requires capital investment planning and budgeting. Most organizations prepare a capital expenditure budget as part of their annual planning and budgeting cycle. Ideally, this capital budget is based on detailed investment wish-lists, thereby providing a baseline planning assumption regarding required capital investment funding requirements. This detailed capital budget allows management to anticipate the operational impacts of investments to support the preparation of reliable financial forecasts and resource plans.

Capital expenditure requests are classified as budgeted or unbudgeted, depending on whether the proposed expenditure was anticipated and included in the annual capital budget. Where an initiative has been budgeted, the approval process is typically shorter than where the item is unbudgeted, as the investment will have been granted preliminary approval through the budgeting process. For unbudgeted capital expenditure requests, initiators seeking approval are typically required to identify substituted projects to stay within the overall capital funding budget envelope. Where capital investments have not been budgeted, and are not replacing other budgeted initiatives, approvers will need to ensure availability of human and capital resources to successfully deliver these projects.

Capital Expenditure Control

As part of their fiduciary responsibility, executives need to ensure that the actual expenditure on approved capital investments is carefully monitored and controlled. Whilst some lower-value capital investments are direct purchases from a single supplier, higher-value capital expenditure involves multiple cost components, over multiple periods, from multiple suppliers.

In order to aggregate, monitor and control capital investments, these are typically structured as ‘projects’ and all related costs accrued as capital work in progress in the balance sheet, prior to final capitalization as fixed assets.

Within SAP, in order to enforce purchase order cost control in accordance with approved budgets, it is necessary to process all expenditure through Projects or Orders. Approval of a Capital Expenditure Request is typically the trigger to create the Project (or Order) and allocate project budget accordingly.

Stages of Capital Budgeting and Approval

The various stages and terminology of capital investment planning, budgeting, forecasting and approval can become confusing in SAP environments as these terms have specific SAP meanings that may vary from an organization’s financial planning and analysis usage. The common classification of these financial management stages and terms are provided below.

Planned Capital Expenditure

An investment proposal for a capital investment initiative will include an estimate of the likely investment cost. This initial estimate will typically be presented as a value range and be based on key assumptions. This estimate will vary over time due to changes in underlying assumptions, clarification of requirements, and more detailed analysis of available implementation options.

Budgeted Capital Expenditure

The capital expenditure budget refers to the amount of money set aside for funding of capital investments. As opposed to operational expenditure budgets (Opex), capital expenditure budgets will initially be reported on the balance sheet, and then impact the profit and loss statement through capital depreciation over future periods. Effective capital budgets are normally based on a list of prioritized initiatives, expected to provide the maximum benefit to an organization’s long-term success. Initiatives are included in a budget at the planned cost at the time of budgeting. Budgeted capital expenditure is normally conservative and should include an amount of contingency.

Approved Capital Expenditure

Capital expenditure is approved when investment requirements are clarified just prior to procurement. For larger capex investments, a fully-fledged business case will be presented in support of the initiative. Capital expenditure approval is normally given in compliance with an organization’s delegation of authority matrix. Capital expenditure may be approved even if the project was not budgeted.

Committed Capital Expenditure

Once a capital investment is approved, procurement activities can commence. If the capital expenditure request does not identify the supplier, a further approval of any purchase orders may still be required. Once a purchase order has been placed with a supplier, this amount is considered ‘committed’.

Actual Capital Expenditure

Actual capital expenditure is recorded when ordered goods and services are received. It should be noted that this precedes the invoice receipt or payment date. When referring to project cash flow, care must be taken to clarify whether these are based on the accrued actual cost date or the invoice settlement date. As invoice settlements are subject to negotiated payment terms, and largely fall outside the control of project managers, actual expenditure and forecasts are generally based on this accrual date, which may be many months ahead of the actual payment date.

Forecast Capital Expenditure

Forecast capital expenditure is the revised likely investment cost at completion. Forecast capital expenditure combines actual costs to date with committed future costs and best estimates of additional expenditure to go. Unlike the budgeted capital expenditure, which is part of the formal budgeting process for a defined period, the forecast capital expenditure extends beyond that period and helps organizations plan for future capital investment requirements.

Supplementary Capital Expenditure

Supplementary capital expenditure requests are raised when the forecast capital expenditure exceeds the approved capital expenditure amount. These are typically unforeseen or unexpected costs and may not have been included in the original budget or forecast.

Capital Budgeting in SAP

SAP Investment Management is an included module of the SAP ERP system that provides the functionality to effectively manage capital budgeting and expenditure requests. SAP IM capital budgeting has extensive features that range from appropriation request submission, to program planning, to project allocation, and to on-going project performance monitoring. The integration with other SAP modules and robust reporting capabilities further enhances the effectiveness of capital expenditure management and increases capital project success rates. By utilizing SAP for capital budgeting, organizations can improve financial control, optimize resource allocation, and make well-informed investment decisions to achieve their strategic objectives successfully.

Diagram of SAP Investment Management Workflow Diagram showing the Capital Expenditure Management process

Investment Program Positions

Investment programs provide a hierarchical framework for the top-down distribution of budgets and plans to individual responsibility areas. Investment program positions are the leaves at the extremity of this tree-structure. Investment initiatives are assignable to these investment program positions. Budget is distributed top-down through the investment program nodes to these lowest-level investment program positions and is then ultimately distributed to individual investment measures on approval.

Appropriation Requests

Appropriation requests in SAP identify the investment demand by variant (option) and may include a preliminary financial analysis including key financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. Appropriation requests identify the key participants, including responsible person and sponsor, and can be used for workflow and approval with status management.

Appropriation requests are initially assigned to Investment Program Positions, and the planned cost of approved Appropriation Requests can be rolled-up through the investment program. On approval of Capital Expenditure Requests, Appropriation Requests are replaced by Investment Measures, and approved capex budget is distributed from the assigned Investment Program Position to the Investment Measure. Appropriation Requests are relevant to planning only – they never receive a budget distribution and cannot be used as an account assignment for procurement.

Investment Measures

Investment Measures are the projects, internal orders, or work orders that collect all the related costs of a capital investment and then settle to a resulting fixed asset. For control and monitoring purposes, Investment Measures can be assigned both budget and planned cost per fiscal year. In typical SAP configuration, capital costs are initially assigned to expense accounts (such as External Services), and then capitalized as Capital Work-in-Progress on a monthly basis.

SAP Projects are the preferred Investment Measure as the work breakdown structure of a project and its network of related activities can be effectively represented, and each component scheduled, valuated, and controlled. Internal Orders are a simple cost collector, and most effectively utilized for simple direct asset purchases only.

Expenditure Budgeting and Planning

In SAP terminology, budgets are the top-down limits imposed on approved spending. Budget availability checks can be activated to prevent purchase orders being raised or invoices being assigned that exceed the available budget amount per year. There is only one budget, and any variations to the original budget are handled through supplements and returns.

In SAP, plans are less restrictive than budgets, but also more detailed. Whereas budgets are annual, plans are monthly, and more effective for operational monitoring and forecasting. Plans are version controlled, to provide traceability between revised plans and forecasts prepared during the year.

Standard SAP functionality helps ensure that lower-level plans and budgets cannot exceed higher-level allocations. SAP standard investment management reporting provides effective monitoring of the investment program budget, revised forecasts and actual expenditure and commitments.

Changes in Capital Budgeting with S/4HANA

SAP customers will have recently upgraded, or will be in the process of upgrading, to SAP S/4HANA. This is an important opportunity to consider the scope of your investment towards capital expenditure management in SAP, as there are some key changes and opportunities to consider.

Planning Data Structures

The legacy budgeting and planning functionality and data structures of SAP ECC have been retained in S/4HANA. However, as with the migration of actual cost into the new flexible ACDOCA universal journal, the preferred repository for planning is now the ACDOCP planning table. New SAP-provided Fiori Apps and integration with Business Planning and Consolidation (BPC) and the SAP Analytics Cloud (SAC) target this planning structure and not the legacy budgeting and planning structures.

As an interim measure, it is, however, still possible to transfer your Project Systems budgeting and planning data to the new structures using the program R_FINS_PLAN_TRANS_CO_ERP_2_S4H.

Business Technology Platform (BTP) for Capital Budgeting

SAP BTP presents an exciting opportunity to leverage the broad range of BTP services to optimize the capital expenditure management process. Key services that can be adopted to support capital expenditure management include SAP Analytics Cloud, SAP Integration Suite, and Fiori user experience optimization and workflow with SAP Build Process Automation.

It is important to note, however, that adoption of a Fiori user-experience for capital expenditure management is not reliant on BTP or S/4HANA. SAP customers can initiate their Fiori user-experience optimization journey today, with their current ECC platform, in anticipation of a future upgrade and migration to S/4HANA.

How to Improve the Effectiveness of Capital Budgeting with SAP

Customers who run SAP as their core financial system often neglect the investment management functionality available within their system, and still rely extensively on spreadsheets to manage this critical business process. The key strategies for getting more value out of your SAP technology platform are to improve the end-user experience, optimize workflow, automate transactional integration, and improve analytical capabilities. An effective capital budgeting process is critical towards improving your capital expenditure management process.

Fiori Apps to Engage and Delight End-Users

The capital budgeting and expenditure management process involves the most senior executives within any organization. Indeed, a key fiduciary duty of executives is to preserve the assets of an organization and invest its limited resources wisely. A key reason that many organizations did not adopt SAP Investment Management functionality was due to the poor executive user-experience.

However, SAP Fiori provides a modern and intuitive web application experience for all process participants. By adopting SAP Fiori, the user-interface for all stakeholders can be tailored to provide a more intuitive, productive, and engaging experience. This is achieved by simplifying the required data entry where possible, and adding additional classifications and texts where required, to enable executives to make more confident business decisions and accelerate approvals.

Workflow Automation for Acceleration and Control

A key control in the capital expenditure management process is to ensure that all expenditure is authorized in accordance with the organization’s delegation of authority policies. When approvals rely on email exchanges, this compliance is hard to monitor and audit. However, by automating the approver determination and workflow routing within SAP, management can be confident that required approvals are being obtained.

Required role approvals are based on the value and classification of expenditure requests. The determination of the current person fulfilling each approval role can be made with reference to the HR system to ensure that any personnel movements are efficiently accommodated. Centralization of substitution rules ensures that delegates are notified when primary assignees are unavailable.

Orchestrate Integration for Accuracy and Productivity

Whilst SAP functionality does support the capital expenditure management process, sometimes many individual transactions are required to support a single business decision. For example, the approval of an unbudgeted capital expenditure request may necessitate the following SAP transactions:

  • Return Budget from an ‘unbudgeted projects’ investment program position (IM38)
  • Supplement the Budget on the business unit’s position (IM30)
  • Create the Project (CJ20N)
  • Distribute Budget to the top-level WBS element (IM52)
  • Perform a secondary Budget distribution to lower-level nodes (CJ30)
  • Update the monthly expenditure forecast (CJR2)

Orchestrating these transactional updates based on standardized business rules can greatly improve data accuracy and team productivity.

More Accessible Self-Service Analytics

Timely monitoring of capital expenditure forecasts is crucial to being able to take mitigating action when actual experience deviates significantly from expectation. If projected costs are likely to exceed anticipated benefits, capex projects should be urgently stopped. Delays in project delivery may allow other initiatives to be brought forward. A key requirement for effective analytics is a secure, reliable, single source of truth. When the capital expenditure management process relies on manual exchange and collation of spreadsheets, an organization’s ability to influence outcomes on a timely basis is greatly impaired.

In addition to standardized executive and operational analytics, the value of this information is further enhanced when key participants can directly access and interact with the data. Whilst Excel is a poor data source, it is an excellent tool for dynamic self-service analysis. Providing secure access to investment management data directly from Excel can greatly enhance productivity and process governance.

Harnessing the Power of Capital Expenditure Management with IQX CAPEX

If your organization runs SAP, but still relies heavily on spreadsheets for capital budgeting and forecasting of capex projects, the core capabilities of SAP should be further evaluated. The process extension capabilities of BTP should be considered for optimizing the user-experience, workflow, analytics, and integration to SAP. However, if you don’t have the time or experience to build your own solution ‘freestyle’ from scratch, you should consider IQX CAPEX, from IQX Business Solutions.

IQX CAPEX combines a SaaS solution for demand management and business case development with a ready to run suite of Fiori Applications to help SAP customers get the most value out of their key resources and funding capacity. Capital expenditure management is a process that should always be improved upon, and IQX is here to help you today.

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