When it comes to capital assets, especially in a manufacturing facility, the one person who cares the most may not be the Engineer or Project Manager overseeing the installation, but it just might be the Controller (or Comptroller) that processes all the related costs and integrates this information into the facility’s and/or company’s financial picture. Industry analysts predict increased capital investment by manufacturers in 2015 and 2016, so its wise to know how to best engage this important stakeholder: the Controller.
Unlike other business expenses, capital expenditures are special in how they impact finances. Capital is unique in that it is:
- An asset. Land, buildings and other equipment used to delivery goods and services are considered assets. Capital assets are not readily liquid in the course of daily operations, and they often cost an order of magnitude more than regular expenses.
- Long-lasting. By proxy, capital assets tend to live a long time, with tenures often surpassing the average employee. Most companies define the life of capital in categories, like computers, equipment and buildings, typically ranging from 3 to 30 years, respectively.
- Depreciable. Once the ‘expected useful life’ of new equipment or facility improvements is determined, its cost is allocated over that future period of years. Depreciation reflects the asset’s expected loss in value over time due to wear and use; depreciation methods vary, but straight-line is typically used for its simplicity. U.S. businesses may take tax deductions for depreciation.
- Tax-Exempt. For many U.S. businesses, by state, equipment related to manufacturing may be partially or fully exempt from sales tax. If this is the case, the Controller will have a tax-exemption certificate to may present to the equipment supplier prior to purchase.
So, beyond the critical requirements of selecting the right equipment or facility improvements to meet the needs of Operations and supporting departments, capital projects demand special fiscal considerations. Capital projects are unique in the larger amount of capital, namely cash investment and labor, to execute them. And in turn, they get a lot of attention!
Here are five keys to engaging the Controller on capital projects:
- Communicate! Work with the Controller every step of the way. She can provide a keen eye regarding proposal budgets to be sure they include customary costs. Share plans for purchases prior to requisition and follow up as invoices are approved and paid. Ask her what information she needs and when she needs it!
- Accurate budget. A clear plan allows for a comprehensive budget. Track actuals against the proposal budget along with all changes. Keep this updated, and count on being asked to report out on demand!
- Ensure expenditures meet capital requirements. As outlined above, capital expenditures are unique and potentially carry tax implications. Know the company’s guidelines and follow them from planning through procurement.
- Forecasting, especially for carryover. Most companies budget capital projects by the fiscal year, but it may not be realistic to start and finish every project within the calendar. Projects incomplete at year closing with open financial commitments must be identified, with clear details on how much. Depending on company practices, projects carried over years may impact available budget for the coming year, as well as muddy the picture of available cash for other endeavors.
- Retired assets. All equipment eventually needs to retire, whether due to obsolescence, excessive cost to operate or maintain, or catastrophic breakdown. Keep the Controller informed so he may “write off” equipment, especially items that are not fully depreciated. Make sure he is informed before he gets a check from the scrap metal yard!
An engaged and informed Controller can be a wonderful partner to ensure capital projects are successful.