We all know things rarely go 100% as planned. It’s why, though you start with a budget, you know full well that once the real world of actually conducting business, contracting with vendors, and scheduling labor starts, you’ll need to make updates.
That’s why we need a forecast, both from a micro and macro perspective. Capex projects don’t exist in a bubble. Plant management needs to know all inputs that impact P&L activity for upcoming periods. Capex project owners also need to be aware if there are sudden changes in demands for funding or labor that may cause delays in their project and make updates accordingly.
On the macro side, we need to be in line with other financial projections for the company. If we plan to increase sales revenue and increase the number of employees to achieve expansion, we need to plan Capex to support the growth. If several expansion projects get delayed, the corporate team may need to factor in slower growth estimates when communicating with the public.
Ok, we know forecasts are an important part of the financial process. So how can we make them more accurate?
- Make it company policy that monthly forecasts must be created for all Capex projects!
This may sound like a no-brainer, but if you don’t have a stated policy/process in place, compliance is likely to suffer. Elements of a sound policy include:
- Forecasts should be due by a set date communicated in advance to all users (ideally on a shared calendar)
- Forecasts are required for *all* projects regardless of size or project type
- Forecast detail is rolled up, consolidated and reviewed by each level of organizational hierarchy. In this way, everyone knows what is in their numbers and what they are committing to delivering.
- Significant changes from budget and/or prior forecasts should be easily identifiable — helping to quickly identify possible data entry errors or highlight projects that need a deeper review, or be re-reviewed.
- Timeliness and accuracy of forecasts should be used as a gauge of plant/business unit performance; leaders must be held accountable for their estimates. Along with shining a light on ROI, it almost always leads to better performance.
- A standardized, required review of projects helps prevent overly optimistic expectations of project performance. Requiring forecasts and holding individuals accountable for accuracy forces them to be more realistic in their expectations and helps eliminate bias in project performance.
- Additionally, facilitating “reference class forecasting” — or basing forecasts on historical results of like projects — can help to eliminate a bias for predicting base-case scenarios. This, of course, requires data (which is something you can easily access with Finario’s new Finario Predict feature).
- Make completing, submitting, and consolidating forecasts as easy and user-friendly as possible. The simpler it is for users to submit information the more likely leadership will actually get useful input. Streamlining the consolidation of forecast data means more time for meaningful analysis and time to address concerns.
- A true Capex forecast does not stop at fiscal year end. All projects should submit forecasts for their entire project life, including carryover into future fiscal years. This carryover is an important input to the next budget cycle. Consider implementing rolling forecasts.
This all appears intuitive, so why isn’t it done more? Most likely is the sheer amount of time and effort required. At most companies, Capex processes continue to be managed on a mixture of SharePoint, email, spreadsheets, disconnected homegrown applications, and a huge amount of manual effort. It’s just not practical to collect meaningful Capex updates and review them monthly (or even quarterly!) in this kind of environment.
So how do we solve these challenges? The answer is by using a capital planning system, like Finario, that encompasses both the traditional Capex approval process as well as FP&A’s planning, budgeting and forecasting processes for capital. With Finario, you have all Capex information in a central location: budget and actual results are easily accessed in one location making it easier for users to complete a forecast for the remaining life of a project. Once submitted, detail is immediately consolidated, viewable by all users, and reviews can begin. Finario’s standard reporting allows users to compare current forecast to prior period, budget, or any user defined period.
Bottom line, a capital planning solution like Finario checks all the boxes – making the forecast process simpler, smoother, and more productive for both the project owner, finance teams, and leadership.
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