5 Tips for Capital Procurement in 2014

By Jacques de Klerk, Director at RentWorks

Looking at the South African financial landscape, 2014 doesn’t look like a particularly rosy year if you consider that the interest rate was recently hiked by 50 base points to stave off inflation, with predictions that it may increase further this year. The Rand is weak, commodities are under pressure and it’s an election year, which always makes investors jumpy. Some are saying that the boom in certain regions of Africa has bottomed out, and those who are investing in doing in business on the continent need to be prepared for the high risks. Nevertheless, business trundles on, and everyone has to do the best possible to make money in a tough climate.

In this difficult environment, companies are looking for more flexibility when it comes to capital expenditure and procurement. They want options. Where previously they might have bought equipment cash, they now also want the choice of financing it, outsourcing or renting instead, particularly when it comes to original equipment manufacturers (OEMs). In the IT market, this has been particularly influenced by the move towards “bring your own device”.

Where previously companies were willing to spend their cash freely, capital is now earmarked for big projects and core business, and we’re seeing companies returning to the outsource model for non-core expenses. Outsource players and rental companies have to offer clients more value-added solutions to remain competitive, including things like financing software in the IT market (which has definitely stabilised in South Africa) and more flexible packages that allow for changing market conditions or that can be tailored for specific projects.

My advice for capital procurement in 2014 is as follows:

  1.  Think carefully before making decisions. Examine CAPEX versus OPEX and think about the timing of your capital rollout. Don’t get in too deep. Keep obsolescence in mind when looking at capital expenses – you don’t want to get locked in with outdated technology if there’s something newer and more efficient available in the market; you want a degree of flexibility. Don’t risk over-exposing yourself; protect your cash. Remember what happened in 2008: in 2007, nobody wanted to borrow, but in 2008 when the markets crashed, there was no credit available. Allow yourself a buffer. Use credit while it’s available, get fixed rates now, and protect your cash for core activities.
  2. Examine all the options. There are more options available than ever before, so make sure you settle on the right one. Consider the full range, from structured finance to asset based finance, rental structures, specialised rental structures, OEM rental structures and outsource models. Talk to service providers and find out what flexibility they can offer. Align with suppliers who provide you with good before and after sales service and build relationships with them. Make the best decision for each of your short- medium- and long-terms goals. It makes sense to buy an asset you’ll use for 10 to 15 years, but not necessarily one you only need for 18 months or one that only has a lifespan of three years.
  3. Consider pay-for-use instead of purchase. By all means, purchase what you need for core operations, but then think about your project-specific needs, or what will happen if the markets turn – you want the flexibility to downscale or return equipment that you no longer need.
  4. Think ahead. Think about the financial implications of your capital decisions. What effect will this expenditure have on your weighted average cost of capital (WACC)? And what effect will it have on your return on assets? How will you fund any possible expansion into African regions? What funding options are available? Think ahead. Although it’s not a particularly popular idea in the South African labour market, further automisation is becoming a reality. As business develops, you can’t afford to be left behind. Embracing new technology is critical to remaining competitive, even if it means thinking differently about how to fund it. For example, choosing to finance solar energy equipment instead of outlaying capital.
  5.  Consider the total cost of ownership before you take procurement decisions. Disposal of equipment is costly, yet many don’t think about the expense until disposal is due. Think about the cost of owning, managing and disposing of assets, especially if you haven’t used the asset for its full life. Is your disposal optimised and are you getting the best value?