How to Use Capital Planning to Optimize Capital Spend

How to Use Capital Planning to Optimize Capital Spend

Capital spend is on the rise.  According to the latest Census Bureau report annual capital spend has increased 37% in the past 10 years to $1.7T.  That’s a significant amount of spend and a lot of capital to deploy.  We have recently surveyed our customers on their most pressing issues relating to capital projects and capital planning and received responses from capital planners across various industries.  This article will focus on one of the most pressing issues we heard which is “how to use capital planning to optimize capital spend”.

The first part, capital planning needs to be done right in order to accomplish the second part, capital optimization.  Let’s start with capital planning.  Here are some guidelines we recommend to get your capital planning ready for capital optimization.

• The process should be continuous – not a once-a-year annual exercise but rather a fluid process that is revisited on a quarterly basis
• Cash management is critical. Cash is needed to fund all capital projects.  Planners are usually blindsided when the CFO asks to cut spend due to balance sheet challenges or cash shortages.  Stay close to your CFO and provide a cashflow analysis as part of your capital planning process.
• Early-stage prioritization is a critical part of the planning process. Have a systematic way of prioritizing projects.  Do not overcomplicate this process as people will withdraw from it over time.
• The capital appropriation request process (review and approval) should be a well-defined process that everyone understands and is easy to follow. Make it a standardized process to eliminate “gaming” of getting projects approved.

Once you have created the capital plan with the appropriate processes and governance you can then focus on optimizing your overall capital spend.  Optimizing in this perspective means making capital investments that supports the strategic vision of the company, mitigates the company risks and delivers the highest ROI compared to other investments.

How do you ensure all of these Optimization criterions are met?  By implementing the following processes:

• Align project to the strategic objectives of the company. Analyze the overall capital spend portfolio to ensure the appropriate spending supports the company’s strategies.
• Rebalance the portfolio as needed to ensure strategies are not over or underfunded. Create efficiencies by redirecting the funds from overfunded strategies to underfunded strategies or eliminate them entirely.
• Create a prioritization method that will allow you to quickly identify discretionary vs. non-discretionary spend. Eliminate projects from the discretionary bucket until you reach your desired budget targets.
• Finally, create a steering committee to govern all capital spend and meet bi-weekly or monthly to review all capital projects. This is a great time to discuss prioritization, project elimination and spend optimization.

In summary, if you want to optimize your capital spend you have to optimize your capital planning process as a first and important step.  Ensure all the appropriate governance and controls are in place and there is a clear multi-year view of the capital plan.  Capital optimization hinges on alignment to strategies, cash management, prioritization and committee reviews and approvals.  Once all these processes are dialed in you will have all the information at your fingertips to optimize your capital spending.  If you would like to learn more about Inpensa Capital Planning and Capital Appropriation Request Solutions contact us for a demo.