CAPEX (capital expenditures) planning is a key feature in Workday Adaptive Planning and gives the Office of Finance and senior executives greater visibility into the company’s financial risk, while also providing a tool for measuring corporate growth. Before we go into the specifics of CAPEX in Adaptive Planning, let’s take a step back and get an understanding of CAPEX.

Capital Expenditures: Overview

Capital expenditures are expenditures within a company that are not expensed on the income statement. They are considered to be investments into the company. Companies with higher capital expenditures are said to be investing more heavily into the future of their organizations.

CAPEX to Operating Cash Ratio

The CAPEX to operating cash ratio analyzes a company’s ability to acquire long term assets using cash flows. In other words, it indicates how much of a company’s cash flows is going towards capital expenditures. It is a great tool for measuring a company’s emphasis on growth. A higher CAPEX to operating cash ratio is an indicator of high growth in a company. A company whose ratio is too high could be taking on too much financial risk. While it is beneficial to invest in CAPEX, overspending in this area can compromise a company’s ability to pay off debts or cover other operating expenses. It is vital for the Office of Finance to have accurate, up to date visibility into CAPEX data in order to assess the company’s level of risk and make appropriate adjustments.

CAPEX and Depreciation

Depreciation is important to consider for asset management, especially for companies who are putting a lot of money towards their assets in the form of capital expenditures. A company must consider how their CAPEX depreciates when looking at their assets. This is a helpful tool to consider:

CAPEX > Depreciation → Growing assets

CAPEX < Depreciation → Shrinking assets

Accumulated depreciation of capital expenditures is indicated on the Balance Sheet, so it is important to consider how this impacts the net income of the company. Depreciation reduces the taxable income of a company, which is impactful especially for companies in a high growth phase who are investing heavily in capital. In addition to the CAPEX to operating cash ratio, depreciation can also be considered when analyzing a company’s growth.

Capex Planning in Workday Adaptive Planning

In addition to having a basic balance sheet and a P&L sheet, you should create a CAPEX sheet in Adaptive Planning. The CAPEX sheet offers a more specific look at capital expenditures than the balance sheet and the P&L sheet, allowing for more targeted analysis. Generating a CAPEX sheet also allows you to drill into expenses and depreciation for budgeting and forecasting purposes on a more granular level.

In conjunction with the balance sheet, the CAPEX sheet is important for budgeting cash and analyzing capital investments. In Adaptive Planning, the CAPEX model consists of calculated accounts in a modeled sheet. These calculated accounts include capital values and their coinciding depreciation accounts. Each modeled account is performing the same calculation based on the asset class selected by the user. Asset class is a text selector column based on the categories of capital expenditures that are specific to your business. Companies vary greatly in the ways that they calculate capital value and depreciation, but all businesses can benefit from CAPEX planning.

Adding a CAPEX sheet to your Adaptive Planning implementation gives you a powerful tool for understanding the investments in your company. When you can analyze this data at a granular level, you can better assess if your company has too much financial risk, or if you are invested at an appropriate level.

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