on June 2, 2022 in Capital Planning

Capital Planning During a Recession

Capital Planning During a Recession

Ok, we are not quite in a recession yet.  A recession is defined as two consecutive declines in quarterly GDP.  However, most experts are warning that a recession is inevitable! We decided to reach out to our customers and other industry leading capital planners to conduct an informal survey asking the following questions:

    1. How are their capital plans changing as a result of the shifting economic environment?
    2. How are they adjusting their plans, If at all?
    3. Is the business giving them any guidance to follow?
    4. Are corporate strategies impacting their overall capital spend?

Here’s a synthesis of the answers to these questions:

When asked if the overall capital budgets are changing as a result of an impending recession a resounding 82% of respondents said “yes”.  As we dug into the data, we found that on a year-over-year basis 62% of respondents said their capital budgets are shrinking and were cut by 10% or more.  This implies that companies are trying to hold on to cash and are slowing capital investments.  We also asked which types of projects are impacted?  Our respondents said they are mostly defunding projects that are tied to “run the business” investments.  These are investments that are mainly due to asset refresh or replacements.

Growth initiatives are still being funded and from our survey over 98% of capital planners said their growth initiatives are still a top priority.  In reading into this data, it looks like companies may be planning on pushing their assets beyond their end of life and holding back on refreshing them.  This is a short-term solution as these assets will eventually need replacement.  However, the near-term benefit may help weather the impact of a slowing economy.

Another important question from the survey was to understand where the directive is coming from in order to reduce the capital budgets.  Overwhelmingly the directives came from corporate headquarters.  Over 92% said their directive came straight from corporate vs. individual businesses or divisions.  This tells us that the executive team is planning for an impending slowdown and are directing blanket cuts across the company.  This is not unusual, however as individual businesses start to feel the pressures of a slowing economy, they will also start rebalancing their budgets and we may see additional cuts.

In summary, capital planners across multiple industries are all heeding to the directives from corporate leaders to rebalance their capital plans.

The directive is two-fold: first is to reduce the overall capital budget and the second is to ensure growth initiatives continue to be funded.

Gone are the days of expensive side projects and the tolerance for over run budgets.  Effective capital planning, governance of capital appropriation requests, stronger business cases and performance tracking are in high demand for this unpredictable economy.

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