The CFO faces many pressures to achieve greater profitability and consistent information to support strategic decisions. The crisis has boosted this strategic role of the CFO and added complexity to its management, multiplying these pressures. Now a major concern of the CFO is decisions on new investments or substitution of CAPEX for OPEX, in addition to those already existing pressures highly grown with the sanitary & global context:
- Provide reliable information and vision that will enable relevant decisions for company’s growth
- Efficiently manage liquidity by preserving cash and optimizing financial products.
- Minimizing risks in an uncertain environment.
- Digitalizing financial management to make it more secure, flexible and agile.
Indeed, the CFO is under pressure to reduce costs while securing the resources needed to improve asset performance and make new investments.
The CFO needs to be able to rely more than ever on the quality of data in order to correctly analyze the financial situation and liquidity, make reliable forecasts and make strategic recommendations to the Board of Directors.
In today’s complex and evolving environment, the CFO will be able to meet these challenges with CPM software that facilitates the tracking of financial performance. They will be able to manage the budget in a predictive way and perform rolling forecasts, as well as simulations in various scenarios to anticipate the future. In addition, they can integrate this planning with reporting and analysis of profitability, indebtedness and the company’s ability to repay debt and undertake investments based on the EBITDA it can generate. They can also easily calculate the operating cash flow and anticipate future cash flows from debt repayment and investment projects.
To recover and increase profitability it is necessary to improve management models, processes and procedures. It is also necessary to review the portfolio of products/services and markets in which the company operates, and to make the right decisions regarding operating expenses (OPEX) and new capital expenditures (CAPEX). These are actions that prepare the company to emerge stronger from the crisis and face future threats.
CAPEX vs. OPEX: the CFO’s dilemma
We can now focus on the process of making decisions about replacing an asset or undertaking new investment projects and its implications:
- Analyzing the useful life of the current asset with its annual revenues and expenses and viable alternatives.
- Analyzing the initial acquisition costs of each new alternative – CAPEX.
- Estimating the operating or OPEX costs that may arise over the life of the current asset and those of the alternatives.
- Evaluating the future cash flows of expenses and income that each alternative would yield.
- Capitalizing those flows to the present time. Thus, calculating the profitability of each alternative using financial indicators together with the decision-making models, ordering them in a hierarchy.
This allows you to assess which alternative is more cost-effective, and whether it fits within your budget.
An example of such decisions could be to plan the migration to the cloud of certain on-premise applications, which involves transforming CAPEX into OPEX. Or implementing new management software in SaaS mode, which requires no initial investment and allows OPEX to be supported only according to specific needs at any given time. In addition, SaaS saves installation/configuration time and other long-term costs and provides cybersecurity in business processes and automatic updates.
CPM software brings reliability to the CAPEX vs. OPEX decision process and feedback between the CFO and other managers involved, to know in real time the status and performance of the assets and the budget level. In this way, CAPEX vs. OPEX decisions will positively impact profitability and align with strategic objectives.