As the manufacturer of a product, it takes many inputs to produce a good for sale: materials, labor, and capital equipment. You have a system to track labor by job. Your job costing system tracks material usage against standards and notes variances. But are you tracking Capex spend? Do you know the status of your capital expenditures: what has been committed, spent, and unallocated?
You devote weeks, sometimes months, to pulling together details for a capital budget. If you’re still relying on manual processes or outdated internally-built systems, this data gathering and planning can take an extraordinary amount of effort. Sure, you may have been getting by with the tools at hand, but at what point do you say this is simply not sustainable? That “tipping point” has arrived for many organizations with the upheaval of Covid. It’s become clear that managing Capex more effectively has to be a priority.
Though you may be able to report on actual project spend and compare it to the current forecast, are you correlating the current month’s spend with your year-to-date trend and what was budgeted? Are you comparing your pipeline of projects plus actual spend against the budget? If you are still gathering actuals from your ledger, forecasts in Excel, or pipeline in SharePoint, the answer is likely “no.”
It’s not that you don’t want a holistic view of your capital, of course you do. You know how critical capital investment is to your business. You also know that poor capital decisions can impact your P&L for years to come. Even if you’ve been able to support the Capex process in somewhat stable and profitable times, what do you do when times are difficult? Everyone knows finance teams work twice as hard when things are not going well.
Now let’s throw in another wrinkle to capital management: actual day-to-day operations. Everyone in finance knows that a budget is obsolete virtually as soon as it’s approved. What happens when someone forgets to include the renewal of a three year ERP license in the budget? Or if changes in the economy make it advantageous to expand a facility? Can you quickly pull together a listing of budgeted but not started projects that could be delayed to offset an unplanned cost?
Again, if you haven’t digitally transformed your Capex management, in all likelihood the answer is, “no.”
Case in point
While I was working for a large manufacturer overseeing the capital process we brought in a new VP of operations. As was customary, the new VP toured operations all over the world to get the lay of the land; touring a facility in Southeast Asia, he noticed a substandard pump testing bunker. (A test bunker is a hardened area where pumps are proof tested; if there is a failure/rupture the damage is contained safely.) We were immediately told to allocate $13M for an upgrade. This was more than 10% of the current year budget and of course *not* included in said budget.
We spent over a week and two weekends reviewing multiple spreadsheets to try and come up with a plan of what to delay until the next year to cover this bunker program. With an integrated budgeting and reporting tool, we would have had a list of options in an afternoon.
This year, as the pandemic took hold in March, enterprises across the globe were thrust into the position of having to re-evaluate their investment strategies, the merits of individual projects, and their capital positions. In situations like this, accuracy and speed matters. In more ways than one, agile decision making has become the “new normal.”
So how do I go from budgeting projects to actually managing a project portfolio?
To get past simply approving projects and collecting costs to aggressively manage spend against an established strategy, you need insight. This insight comes from an Enterprise Capital Planning (ECP) solution like Finario. Think of it as an EPM for Capex.
Finario houses multi-year budgets, dynamically routes approvals and reports on the status of your project pipeline, integrates with your ERP for actuals, and allows users to enter forecasts. Since Finario is cloud-based, any user anywhere has access to their results (as permissions dictate). Our budgeting process allows you to create portfolios of projects based on ROI or project type and see the return of a given portfolio. Moreover, you can always compare budget against actuals and see the latest user-submitted forecast.
Fact is, with an ECP like Finario you actually review and manage capital spend, not just report it. You can assist leadership with those difficult reviews where a percentage of spending has to be delayed. And when the pandemic passes (and it will) and business turns back you can easily prioritize projects to maximize your ability to seize opportunity faster than the competition. Your recommendations will be made with confidence because you have the latest data and can present it in a manner that is easy to follow and believe.
In short, you can do your job doing what’s in the best interest of your company.