What dominates the capital expenditure decision?
up new projects starting from scratch. It involves beginning from ground zero and involves a lot of time.
For example, if you wish to get into a hotel business then it will involve selection of land, getting requisite permissions and then constructing it as per one’s specifications. Here the bottleneck let me warn all of you is getting permissions. Many statutory authorities now claim that taking permission is a single-window clearance. In short, a business person need not approach multiple authorities for projects. Unfortunately in many cases, this is not true. So, before taking up such capital-intensive projects one should do sensitivity analysis.
Feasibility or viability
Sensitivity analysis is checking the viability of the project even in the worstcase scenarios. One more key management input should be shared here. Many entrepreneurs and business persons get so personally and emotionally attached to the new projects that they only look at the feasibility of projects. Unfortunately, even in many educational institutes, the emphasis is on feasibility. I strongly suggest that apart from feasibility a business person should pay equal or more attention to the viability of the project.
The difference between feasibility and viability is that the former focus on whether a project can be done, whereas the latter evaluates if the project can be profitable. Here the keyword is profits.
Before going for any new capital expenditure, a business person should analyse the new project to ensure that it is viable. This analyses should account for the worst-case scenarios as well (this is also called stress testing of projects). When a project passes such stress tests then one may think of proceeding else it is better to defer capital expenditure in these challenging times like COVID-19.
Next week, we shall discuss the remaining ‘C’.
Dr Menon is a business coach and has a youtube channel menonmantras where many videos are uploaded for benefit of the business community and employees.