What Is Capital Planning?

The act of a formal planning process requires you and your company to zoom out, way out. So often individuals within an organization get caught up with the day-to-day that they hardly have an opportunity to think about next quarter’s strategies, much less one to five years down the road.

Capital Planning is here to help.

Even those companies that do have a “5 Year Plan” often fail to align those goals with a formal capital planning process. Without doing so, many of these plans turn out to be not much more than “pie in the sky dreams” or even more simply put, tag lines, and “company vision statements.”

Of course, tying in a Capital Plan with strategic plans is more work, but without it, you could run into problems.

Below we are going to explain the basic components of the Capital Planning process and steps you can follow to implement a Capital Planning team within your role and/or organization.

Capital Planning Basics

• Capital Planning – The process of budgeting resources for the future of the organization’s long-term plans. Not limited to plans already in place, but also on the projection of future projects and their gains and losses.
• Capital Request Form – This form is created and used to standardize the process of information gathering for each capital planning project detail. This form allows the planning team member or members to quickly scan and vet the information concerning its specific project.
• Capital Project Drivers – Every organization has different definitions of drivers, but typical common drivers are growth, obsolescence, regulatory, strategic, alignment to the project goals, and cost reduction and/or avoidance.
• Capital Planning Group – This is the team or team member responsible for the management of the Capital Planning project. They are generally in charge of vetting the capital request forms for sub-projects, prioritizing and reprioritizing the available capital, condensing, and reformatting project information for presentation to management and executive approval.
• Capital Management Committee – These are the managerial or executive persons or groups responsible for approving or denying the Capital Planning project’s funding and spending plans.
• Capital Project Approval Processes – This process is typically unique to your own company, but these usually require different formatting, version control, and approval processes. Many companies have different Capital Planning approval processes for differing amounts of capital. For example, one company might have any project expected to have a spend of over $500,000 be required to go through their major approval process, while another company might consider this figure to be far below their risk level, and only require amounts of 10 million dollars or more to be fully vetted.
• Minor Versus Major Capital – As mentioned above, each company will have its own risk tolerances. Minor Capital categories require little to no formal approval while Major Capital categories might require months of intensive research and several rounds of vetting before it moves to a board of directors vote for approval. Each company will have its own delineation on Minor and Major capital categories for its Capital Planning processes.
• Operating Capital Versus New Capital – An example of minor capital. Generally, routine or Operating Capital consumes the bulk of business operations and is standard and expected. These projects can have bulk or automated approval as long as they fall within company parameters.
• Finance – This portion of your Capital Planning team has a hand in both the Capital Planning Group side, as well as the Capital Management side. For instance, you might have a financial analyst on the planning side, and the CFO on the Management side that has the final say and can officially approve capital funds to be spent.
• Management Programs – Inpensa provides a unique and custom-built Capital Planning management software program that can provide the platform you and your team need to effectively manage version control; be team enabled to allow for edits without sending files via email; and format reports ready for your Capital Management Committee’s approval.
• Business Unit Leaders – These are the leaders of the multiple operating groups who sit on the Capital Management Committee for the approval process. We already talked about the Finance portion above (CFO) but this could be anyone from a manager of a department to the president, CEO, or even board of directors, if the project is large enough.
• Monthly Variance Report – These reports are sent out monthly (sometimes quarterly) to inform the decision-makers of incremental progress. They also serve as an early warning detection for everyone on the capital planning team. Detecting overspends, delays, early wins, and budget surpluses about every 30 days. These are increasingly important as the modern world causes pricing and logistics to change by the minute, versus changes by the month, quarter, or year in the past.

Now that we have a basic rundown of the who and what is working with the Capital Planning Process, let’s  continue to why Capital Planning and using software you can trust is important.

Planning Helps You Avoid Problems

Capital Planning is a tight rope. There are, on one hand, executives, and heads of departments who over-promise, and expect you and the Capital Planning team to “make the numbers work” on near-impossible projects, and on the other hand there is a team of financial professionals who often times get into a habit of saying “it doesn’t make financial sense for the company to pursue this project/idea/dream at this time.”

This may be done without doing the true due diligence every capital investment requires. Inpensa offers a custom-built Management Software that allows every company to complete the due diligence needed and demanded for both sides of this tight rope.

On the first hand, a program like Inpensa’s allows you to fiscally prove to a senior member of the organization that a Capital Expenditure/Investment doesn’t align with the current goals of the organization with clear facts and numbers.

The opposite side of this tight rope is also solved by Inpensa’s offering of a strong and streamlined solution that allows the Capital Planning team to cut through the busy work of structuring, finding Excel formulas they have long forgotten, and formatting version after version to fit individual aesthetic preferences with a pre-formatted reporting dashboard.

With all of this, a Capital Planning team can quickly get to work on the actual numbers and planning of every project, not just the Major Capital categories. This leads to increased performance on the Capital Planning team and increased profits, lower risk, and more effective long-term success for the overall organization.

Steps For Effective Capital Planning

1. Ground Your Plan In Reality – Many organizations that are starting the capital planning process from scratch make the mistake of not making plans based on past performance and present numbers. Organizations often make the mistake of desiring 300% growth in the next five years, when the past five years have produced 85% growth. It is much better to be realistic and grow 105% in the next five years with a Capital Plan based on reality, than to wish for 300% growth and get 80% again. A thorough assessment of the prior five-year financials and operating performance is key to understanding liquidity needs and drivers in the future for performance, along with the macro view of your organization’s business and commodity cycles. Dream big, but have a plan in place to produce your organization’s vision.
2. Define Your Companies Five-Year Strategic Plan – Plans and priorities are a requirement, and tools like Inpensa’s Capital Planning software can help you with expected capital requirements and how they can align with the organization’s long-term goals.
3. Financial Modeling – This is where Inpensa thrives. Financial modeling is what Inpensa makes easy. Without a program like Inpensa’s case management software, you can quickly lose yourself within increasingly cumbersome and non-uniform financial models. Financial models quantify the impact of capital, ground your numbers with historical performance, and give decision makers easy to read financial reports and understand overviews on the expected capital needs and gains as projects move forward.
4. Modeling Alternatives – Use software like Inpensa’s to design alternatives to capital expenditures and deployment. Some of the most successful ideas for organizational success come from the Capital Planning team asking “What if?” What if we tweaked this plan? What if we explored this opportunity instead? Big wins come from using modeling software that allows you to confidently and easily explore all the options for your organization.
5. Implement the Plan – Meet with the decision-makers within your organization. Ask them what the Capital Planning structure and approval process is for your company. Now it’s time to get organized. Play by the rules and policies provided to you, document, research, model, and present your plan. Get approval, provide monthly reports, and meet your goals.

Inpensa knows Capital Planning comes with many frustrations, but our project management software is not one of them.

Follow the above instructions, get to know your team, and meet your goals with Inpensa’s custom software and Capital Planning advice and modeling. Do not let your companies Capital Plan become just another company “vision.”