Inflation comes back after 10 years, what does it mean for your CAPEX strategy ?

July 20, 2021
5 min

Since the break of the covid-19 pandemic, companies have been facing multiple challenges (e.g., lockdowns, labor shortages). Combined with the Ukraine war, those crises have triggered significant price increases across all supply chains. Even the rising interest rates are not expected to lower inflation in the short term.

Rising inflation, definition, and what does it mean for your company?

To cope with rising raw material prices, businesses have to increase their prices, fostering high-level inflation across all sectors. To fight inflation, central banks are raising their interest rates, thus increasing the cost of capital. Companies have to re-assess the impact of their investments and reevaluate their expected performance. As prices go higher, businesses tend to adjust their investment spending relative to changes in the cost of capital. In June 2022, inflation became a massive issue in most developed countries: 78% (!) in Turkey, 10.3% across OECD countries, 9.1% in the US, 8.6% in the Euro Zone, 5.8% in France, and 8.2% in the UK. (OECD Database, 2022). 

To put it short, inflation means a rising cost of cash and leads to a rising cost of capital. Companies must therefore re-assess their investment portfolio and increase the accuracy of their spending forecasts to avoid value leakages by:

  • Reducing the cash sitting idle between the project validation and its actual spent as its value decreases
  • Increasing the project execution speed as suppliers are passing through the inflation impact on you 
  • Increasing scrutiny of projects to select projects for which the return on investment (ROI) to cover

Capex management within an inflationary context is challenging: as the costs of projects rise, it’s important to invest in the right projects, delivering the highest value to your business.

Rising inflation, what should you do?

Inflation will definitely affect capital budgeting, due to rising interest rates impacting the cost of capital. 

Under such circumstances, CAPEX expenditures don’t necessarily need to be cut, but investments should be done the right way: focusing on the right projects for the company, and being more strategic in your CAPEX investments. It’s important to keep an eye on all your CAPEX projects, selecting the most promising and profitable ones. This can only be achieved with a transparent approach and the right governance and alert processes, combining a strategic and execution view. 

It’s important to be able to review project execution as well as to predict your spend trajectory (i.e., billing and the payment date). 

A good way to manage CAPEX in hard times is definitely to keep investing, but adopting a dynamic portfolio management approach to effectively pilot your investments:

  • By accelerating the delivery of the projects and gaining in efficiency.
  • Forecasting the cash needs on a monthly basis to optimize the cash utilization fostering the right projects.

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The right software for you? 

In such uncertain times, it’s important to choose the right tool to manage your CAPEX, a tool able to align strategy and execution in one software, a good tool will be able to:

  • Help you with project prioritization: it should be a software tool that monitors all projects at the same time, letting you easily arbitrate between your projects focusing on the best-performing ones.
  • Increase the speed of execution and prioritize resources that you have by once again combining a very strategic view and a more precise view 
  • Help you forecast and reforecast the cash trajectory of the CAPEX spend and ensure that you allocate the cash available in the most efficient way.

A good tool that will help you to maximize your CAPEX during an inflationary period is an easy-to-use tool that will gather all information and make it intelligible for you. I have a good tool in mind, that will transform your CAPEX Management. 

Let’s discuss it! 

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