When it comes to capital budgeting, there’s no shortage of grievances against the process. And rightly so.


A comprehensive capital plan, which takes months to put together, can become obsolete soon after the ink dries. Projects can take forever to make it through complex, manual approval workflows. And making comparisons to a prior year’s plan can be quite challenging.


In order to take your capital budgeting process to the next level, here are 10 best practices to keep in mind.

  1. Use a rolling forecast to keep your capital plan agile

Forecasting once per year, or even one per quarter, reduces FP&A’s ability to react and adjust to market changes. By the time August comes around, the forecast that was finalized in January is long obsolete.

 

As we said in our article on the topic, “Companies that have implemented rolling forecasts report greater agility in responding to exogenous events and assumption changes.”

  1. Use consistent and rigorous ROI models to evaluate Capex projects

These days, many CFOs are asking themselves what the right balance is between paying down debt and boosting Capex investments. As interest rates march higher, paying off debt can reduce future interest obligations. On the other hand, investing in Capex drives growth.

 

Making optimal capital budgeting decisions requires consistent and rigorous ROI models, which legacy systems often lack. Leaders need objective metrics, such as risk-adjusted ROI and hurdle rate, to be able to see which projects are favorable both on their own and compared to others competing for budget.

  1. Implement the zero-based budgeting approach for Capex to ensure that every dollar is justified

The “traditional” budgeting process creates competition for an allocated amount based on the prior year’s spending, rather than evaluating each project on its merits. This is an arbitrary and inflexible means of evaluation.

 

A zero-based budgeting approach can require more legwork than top-down budgeting, but ensures that every expense is justified. Project owners trim the fat from their Capex proposals, as only those with the most merit receive funding. Plus, expense bloat that’s often a feature of top-down budgeting is eliminated.

 

To hear more on this topic, watch the replay of our webinar Why Start with Capex to Implement Zero-Based Budgeting.

  1. Improve data management to unlock meaningful project comparisons

Poor data governance and a lack of project-level detail are some of the top factors hampering corporate capital plans. As Peter Drucker famously said, “you can’t improve what you don’t measure.”

 

We outlined the reasons why in our article on Opex vs Capex:

 

“Within most EPMs, Capex is represented as a single line item per business unit or per project that reports what has been budgeted and spent, with little project-level detail. Insights into the rationale or projected financial return on the projects, actual dollars spent at any given point in time, and other key information and metrics are rarely available.”

 

A purpose-built financial intelligence solution for Capex can significantly improve data quality and availability, which enables objective, data-driven project comparisons during budgeting cycles.

  1. Know exactly where every project is in the approval process

Whether your company uses Authorizations for Expenditure (AFE), Requests for Expenditure (RFE), or something else, having approval statuses seamlessly available is a game changer.

 

Financial reports and project approvals often live in different systems, which requires going back and forth to get a full picture of what has been committed, is in progress, and/or not yet started. Without having this data at your fingertips, you can never be completely sure of how to forecast cash flow.

 

Which is why having an automated and dynamically updating approval system not only streamlines a cumbersome process, but also provides essential reporting that puts you firmly in control of your entire Capex portfolio status. As we’ve said before, “Capex requests are living, changing and evolving strategic initiatives intended to drive value and competitive advantage. This requires a system that will account for the ever changing elements within specific projects and changes to approval routes and criteria. 

  1. Simulate different project scenarios to see how they’ll impact your budget

Let’s say you have a big construction project in the queue. The ROI is attractive, but accounting has concerns about ongoing expenses and cash flow.

 

When multiple systems are used to manage Capex, these simple questions can be hard to answer. A Capex project proposal may live in a workflow tool, but current project costs live in JD Edwards, and the NPV model is in Excel.

 

Being able to see how project approvals will impact your budget is something traditional tools lack. A capability such as Finario Converge allows you to see how approving one project or another will affect remaining budget capacity in real time.

  1. Leverage automation to reduce employee time spent on non-value added activities

As former ITT CFO Tom Scalera mentioned in his interview with Finario, other departments often wish finance could provide them with more strategic support. Unfortunately, their bandwidth tends to be limited by tedious admin tasks.

 

Leveraging automation in the capital planning process reduces the likelihood of manual mistakes, and frees up FP&A employees’ time to have a more strategic impact.

 

An automated Capex workflow establishes a clear audit trail, and eliminates manual workarounds. Automatic, real-time data prevents human error and the need for employees to manually download and analyze reports.

  1. Use “on-demand” reporting data to streamline the capital budgeting process

Compiling data during budget season is often a Herculean task—rounding up what was spent during the year, how forecasts performed, and other info can require scouring various systems and spreadsheets.

 

A comprehensive solution that provides this data on-demand can vastly speed up and simplify this process. That means less time spent wrangling data, and more time available for value-added work.

  1. Mandate post-completion reviews for material projects

Budgeting and forecasting shouldn’t be a “spaghetti on the wall” exercise. As projects are being considered for budgeting, approval, and subsequent forecasting, the best way to predict future results – and the merits of a given business case – is to leverage historical data.

 

Without conducting post-completion reviews, however, this can be difficult. Having the systems to encourage or even mandate compliance for these reviews can be essential in building that historical data set. Were project goals achieved on time and on budget? Were there issues that arose, and if so, how can they be prevented in the future? What were the lessons learned?

 

Come budgeting time, having insights such as these will go a long way in accelerating decisions, and improving upon them.

  1. Create a Capex Project “Sandbox” with Flagging

Some of the best capital project proposals can (and should) come from the “shop floor.” But if there is no mechanism for them to be input into a shared environment and properly “socialized” for their merits, benefits/risks, projected outcomes, etc., they can get lost in the shuffle.


Finario can provide this functionality along with the ability for managers to flag project proposals that they want to keep an eye on come budgeting season – and beyond.

 

For example, say a manufacturer is debating whether to buy an existing factory or build a new one themselves. Managers and other stakeholders can monitor the new factory project proposal throughout the year, and once budgeting season rolls around, make a more informed decision.

Explore More Finario Resources

Attend our free public demo.

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If Capex is important to your organization, this may be the best 30 minutes you spend in a long time.

Topics Include:

  • Empowering agile decision making
  • Streamlining your approval workflow
  • Features and benefits for finance, operations, procurement and others
  • Incorporating actuals into forecasts
  • Enabling post-completion reviews

Next Scheduled Event

Thursday, June 20th

11am ET (8am PT)

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