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Capital Planning

Integrating capital planning into the investment governance life-cycle optimizes business case analysis and maximizes the impact of capital deployed

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Capital planning is an integral component of making and managing decisions on strategic initiatives. But often, the capital planning perspective is not considered at each step in the investment governance process.

As a result, planning and budgeting executives suffer from lack of visibility to how proposed initiatives will impact the balance sheet and a range of related items, including audits, tax rates, bank covenants, and other areas.

By including capital planning considerations from the earliest phases of the investment governance process, assessing the impact of recognizing certain project costs over time benefits organizations.  The capital planning professional focuses on this fundamental viewpoint across many vectors for a range of reasons.

Inpensa brings a unique perspective to managing capital expenses at organizations operating in fast moving segments. This viewpoint is essential, especially where the effective deployment of capital to highly targeted strategic initiatives is a significant success driver.

By building a core competency around capital planning and budgeting, corporations can create a sustainable competitive advantage.

But this hinges on a robust process designed to fit each organization’s needs, along with the ability to establish a high level of fidelity concerning timeliness and accuracy of data.

Capital Budgeting Process

Several focus areas frame a robust capital budgeting process. Understanding details of expenditures for proposed projects with the evolution of associated business cases is as crucial as it is challenging.

  • Construction in Progress (CIP) – assets received but before their in-service date
  • In service assets – assets where the depreciation schedule is active
  • Roll-off schedule – fully depreciated assets
  • Projected write-downs and impact
  • Schedule of capital expenses for proposed initiatives
Appropriate frequency

Capital Planning Process for Proposed Initiatives

Capital planners need a process that creates a bottom-up view of expenditures that can be updated periodically and integrated with information from projects inflight to create a unified look.

Frequency of iteration should map to the number of proposed initiatives on a rolling basis, with an average number of versions used to refine a typical business case considered, as well.  An environment with ten new business cases created each month that typically undergo three versions each requires more frequent analysis than another where each business case results in one or two versions.

With the appropriate frequency determined, a best practice for incorporating proposed initiatives into the capital budgeting process should include the following steps:

  • Identify any business case that has reached a standard phase of development, for example, a rough order of magnitude (ROM) sizing, and exceeds a total cost threshold.
  • Aggregate all data for business cases meeting the selection criteria.
  • Isolate the proposed total capital spend.
  • Segrate by business unit, region, or other appropriate organizational structure.
  • Combine with expenditures for carryover initiatives inflight and approved initiatives not yet underway or with line items that have not reached the associated in-service date.
  • Provide summary and access to line-item detail for executive review, input and approval.

Guidelines for Capitalizing Labor

Generally accepted accounting principles (GAAP) permits capitalization of labor under specific circumstances.

Eligibility for capitalization of labor applies typically to activities associated with the creation, modification or implementation of an associated asset: Companies and their auditor’s reference GAAP as guardrails for industry and organization-specific policy. Therefore, clear standards and consistent application are essential.

Capital Budgeting Tools

The process and guidelines above, while logical and structured, are fraught with challenges. Overwhelmingly, organizations use off-line desktop tools and manual methods.  This approach creates many problems that frustrate efforts to implement a quality capital planning process.

Because the process is manual and iterative, it is very time-consuming and subject to follow-up and escalation procedures on an ongoing basis to ensure the inclusion of current versions of every business case in each capital planning pass.

Besides timely data collection, capital analysts must manage data quality.  Spreadsheet-based business cases are highly susceptible to errors. A dropped “0”, an inadvertently broken spreadsheet link, or an accidentally modified formula creates the potential for significant issues that can be time-consuming to isolate, trace and correct.

Manual processes usually lack strong governance models

This method means that any significant fluctuations between versions of a business case need to be identified and robustly explored before inclusion in the analysis.

In other cases, users may create an updated version but forward the earlier look unintentionally.  There may be different templates for types of business cases with multiple versions of each, creating more opportunities for inefficiencies, errors and confusion.

A capital planning system must support the audit process, as well

A company must be capable of demonstrating the method used in making decisions to capitalize assets and labor.  The paper trail must withstand top-down and bottom-up scrutiny down to the line item level within a business case.

Different business case types employ unique templates, and each business case has one or more versions used in a typical multi-pass capital planning environment.  As a result, it is challenging to maintain drill back capability consistently with a high level of integrity.

Capital planners need useful tools to support a best practice planning and budgeting process.

Optimizing the execution and management of decisions around capital expenditures requires institutionalization through standardization and automation. Achieving these goals is best supported by purpose-built software that incorporates capital planning into the overall digital investment governance process for strategic initiatives.

Capital Planning Software

Capital planners practice a unique discipline in the organization. Budgeting requires detailed visibility into projected capital expenditures associated with existing operations, carryover strategic initiatives that commenced in prior years, new efforts approved for launch, and new initiatives proposed for future periods.

As discussed, many organizations attempt to marshal capital planning and budgeting with a series of spreadsheets or, in some cases, generalized planning tools, encountering challenges that severely impact fidelity in terms of information timeliness and integrity.

These problems are particularly acute for capital planning concerning strategic initiatives.

Implementation of a digital investment governance platform for business cases and related areas, such as idea pipeline management and benefits tracking, provides a foundation for digitizing the strategic initiative capital planning process.

The emerging best practice for responsive capital planning requires native capabilities within the digital investment governance platform to accommodate the unique requirements of capital budgeting for strategic initiatives inflight or the formative stages.

This approach serves two principal purposes:
  • Delivers software capabilities specific to strategic initiative capital planning requirements.
  • Eliminates the complexity of integrating disparate business case software and generalized planning tools and sub-optimal outcomes.

A software platform that includes native capital planning and budgeting capabilities can automate the creation and updating of capital plans with support for both carryover and new strategic initiatives.  This functionality ensures budgeting professionals have an evergreen view of projects requiring capital allocation that maps to the company’s organizational structure in terms of business units, geographies, or other appropriate frameworks.

A digital capital budgeting platform makes it easy for professionals to track and manage critical attributes of each plan, such as:
  • Overall plan status, e.g., draft, corporate review, executive review, etc.
  • Number of iterations, or passes, for each plan
  • Target date to lock plan for final executive review
  • Overall budget guidance
  • Pipeline of requests across the business
  • Committed amount
  • Remaining available amount from guidance

Also, planners can roll-up budgets at higher levels of the organizational structure, e.g., regional business units, to the global business unit, to the corporate level, and toggle between the current year and prior year plans to compare and analyze.

Beneath plan metadata, the system makes available line item level detail on the requests associated with each business case.  A software solution does this by extracting the capital component and classifying each business case as either new or carryover from a prior year.

Visual cues can indicate whether the initiative owner’s current request maps to the planner’s capital commitment in the current pass of the plan. The planner can view how the request, or “ask” has evolved from the perspective of each plan pass.  The user can increase or decrease the commit for an initiative, which the system will record and reflect with a status flag.

Finally, planners can easily access the business case version that maps to each plan pass with the ability to link to each corresponding detailed business case.

Capital planning and budgeting professionals can maximize precision and impact by managing processes as part of an overall digital investment governance platform.  Platform software drives automation, ensures accurate real-time data, and provides the tools to marshal and visualize information to support an iterative, on-demand process.

Frequently Asked Questions

What is capital planning?
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