Capital expenditure control

Planning and control are inter-linked and consecutive steps for the successful implementation of any programme. Planning done for incurring capital expenditure is followed by control devices to assess the divergences between the expected and achieved results. Control for capital expenditure is expressed keeping in view the above objective.

It may be recalled that capital expenditure is classified into three main forms viz:

1. Expenditure made to reduce costs;

2. Expenditure made to increase revenue;

3. Expenditure which is justified on non-economic grounds.

With exercise control over capital expenditure in any of the above categories, the capital expenditure analysis should concentrate on three types of outlays viz: 1. Major projects, 2. Routine expenditure, and 3. Replacement.

As regards major projects, strategic investment may be made for expansion of productive capacity or achieving product innovation or preparing barriers against capital fluctuations. In the second type of outlay, routine expenditure may be working condition improvement, maintenance expenditure, competition oriented expenditure etc. Thirdly, replacement need may arise to avoid capital wastage for existing equipment to check its disposal value or it may be obsolescence replacement. In all circumstances, proper attention is to be devoted in analyzing the need for the capital expenditure so that it would be curtailed to the minimum required.

One important aspect of control device is to match the demand schedule for the capital and the supply of capital from different sources. Demand comes for capital from all departments and it is at this level control could be exercised to keep the demand at the bare minimum required for the objective inherent in capital investment decisions. Supply of capital, on the other hand, is a scarce commodity and the company has to incur expenditure for availing it. This necessitates for the finance manager to exercise economy in capital expenditure so that optimum benefit could be obtained with the use of scarce capital sources. This establishes the need for capital rationing to impose constraints on capital expenditure under prevailing market conditions and place self-imposed constraints to check the funds being raised from outside agencies like borrowings. Thus, the device of capital rationing is adopted to control capital expenditure.

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