Most companies would agree that the objective of making smart capital budgeting decisions is to ultimately acquire assets that are worth more than they cost.

While the process of making those decisions can vary dramatically from one company to the next, there may be near-universal agreement that said process should be easier and more effective.

You’re not alone if you’ve been budgeting Capex via email and spreadsheets in various formats and with differing levels of detail. Or, if you have an enterprise performance management (EPM) solution that does what it’s supposed to, but really can’t handle the nuances and requirements of capital planning.

You know the “pain.” It comes from consolidating detail, making a summary, comparing requests to historical data, distributing the consolidated budget, tracking changes, rolling in updates, and redistributing docs — multiple times.

Fortunately, there is a better way. Which is why it pays to know “what’s out there and what you should expect from a mature, purpose-built Capex software solution?” 

To begin to answer that question, let’s start with the basics: Are you doing top down or bottom up budgeting? Both have pros and cons and each has its time and place in an organization. Your Capex solution should support and improve either.

Bottom up – the project level approach

Capex is a project-driven activity and ideally should be budgeted project by project. The bottom up approach instills more rigor around strategic selection and ROI potential, and promotes innovation (after all, the best ideas often come from the “front lines” of your business). So it pays to ask: is the architecture of the Capex solution you’re considering truly project centric?  

Yes, the thought of budgeting for every project can seem daunting if you’ve been laboring with spreadsheets. But a truly project-oriented tool eliminates that concern. It allows every user to input their candidate projects in a standard format with detailed financial information … consolidates all projects into a total budget proposal for leadership to review …, and does all this in one location without the constant back and forth of various spreadsheets. A purpose-built tool eliminates much of the “friction” that inhibits companies from implementing bottom up budgeting.

Collecting project-level data in a standard format in a single “repository” is essential but there are other things you need to be sure you’d be getting. For instance, be certain you’ll have the ability to “rack and stack” projects within portfolios. This will allow you to perform “what if” analyses so you can immediately grade and gauge the impact of choosing one project over another, and prioritize them based on good governance. For example: should we focus on expansion projects or on cost reduction projects? What is the cost and ROI impact of individual projects on the budget?

Moreover, be certain you can create multiple portfolios based on the criteria you choose, such as maximizing ROI, focusing on cost control, or growing capacity. If the Capex solution you’re evaluating does not support multiple portfolios then your team will simply not be as effective in making decisions as they could be. This is particularly essential for larger, distributed enterprises.

What about the future? Many projects are about keeping daily operations running: replacing a leaking warehouse roof, upgrading a 5 axis CNC mill, adding safety railing to the loading dock, etc.. But what happens when leadership embarks on a large, multi-phased, multi-year project? A robust Capex solution provides the additional capabilities necessary to manage complexity and long time horizons, including risk assessment and stage gates. 

The top down approach

Top down budgeting, in which leadership sets a target for each business unit, is more of a “status quo” approach used when organizations lack the ability to collect budget data in a timely manner. Aside from being problematic (some say their budgets are obsolete before the “ink dries” on the paper it’s printed on), it can stifle innovation and buy-in from field operators.

So why would anyone still use the top down approach? Well, “a budget” is better than “no budget” and this approach *is* fast and at least provides some guidance. If you don’t have historical data or a firm detail plan for the next twelve months’ spend, then top down may be your only option. For that reason, it still should be supported by your Capex solution.

Be sure your Capex solution will be the sole collection and review tool for your budget even if you are collecting just one number from each business unit. You should not accept a spreadsheet upload without any support or commentary. You should have all budget items submitted via your Capex solution, viewable by all, and reviewed and approved by leadership using a consistent, dynamic and transparent rules-based methodology.

The real world

OK, enough theory and “best practice” talk. In the real world many companies take a “blended” approach. Be sure your Capex solution is well-suited for this.

This means that you should have the ability to submit the majority of your capital budget via the bottom up approach for mature, stable business units — which often leads to budget submitters having greater “buy-in” and ownership of their numbers. Be sure you can set up pools for “have to” projects. Pools are like a mini top down process; you know you have a given spend rate for maintenance so just budget at a high level. Safety and regulatory can also be budgeted via pools; you may not know each and every project that will be required but you know some spending will take place each and every year.

Also, new business units (or very small ones) may be assigned a set budget via the top down method. These organizations which do not have any history may simply not be in a position to create a detailed budget. In this case simply make an educated guess and incorporate updates via the forecasting process. 

In the real world you need to balance the method used to capture useful data vs. the cost of that method. At the end of the day, your goal is to have a Capex process that is easy to administer and engage, which captures the required level of detail, including ROI justification, and which ultimately lead to better decisions, faster..

Final thought

Budgeting in a full-lifecycle Capex solution that affords you the options you need will pay dividends in numerous ways: you’ll have more comprehensive data to work with; you’ll have greater confidence in the numbers you report; and, your annual process will be far more efficient. Perhaps most importantly, you’ll make smarter capital allocation choices that can drive growth, with lower risk.

Which is something everyone in finance would certainly also agree is a good thing.

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