Controller's Guide to Planning and Controlling Operations

11

PLANNING AND CONTROL OF PLANT AND EQUIPMENT OR CAPITAL ASSETS

IMPACT OF CAPITAL EXPENDITURES

Capital expenditure planning and control are critical to the long-term financial health of any company operating in the private enterprise system. Generally, expenditures for fixed assets require significant financial resources, decisions are difficult to reverse, and the investment affects financial performance over a long period of time. The statement “Today's decisions determine tomorrow's profits” is pertinent to the planning and control of fixed assets.

Investment in capital assets has other ramifications or possible consequences not found in the typical day-to-day expenditures of a business. First, once funds have been used for the purchase of plant and equipment, it may be a long time before they are recovered. Unwise expenditures of this nature are difficult to retrieve without serious loss to the investor. Needless to say, imprudent long-term commitments can result in bankruptcy or other financial embarrassment.

Second, a substantial increase in capital investment is likely to cause a much higher break-even point for the business. Large outlays for plant, machinery, and equipment carry with them higher depreciation charges, heavier insurance costs, greater property taxes, and possibly an expanded maintenance expense. All these tend to raise the sales volume at which the business will begin to earn a profit.

In today's highly competitive environment, it is mandatory that companies ...