Compilation of Trends in Finance and Capex: An FP&A Exec’s Guide

Trends in Finance and Capex

There’s no shortage of predictions and prognosticators when it comes to the future of finance, FP&A and the role of Capex in driving corporate growth.

But there is some consensus, which can be summarized this way: Companies need to move faster. Senior leaders must be more strategic. Digital transformation is here to stay. And, as the saying Arthur C. Clark made famous goes, “The future isn’t what it used to be.”

Here, then, is a roundup of such perspectives, and commentary of our own, to inspire your own views and choices.

Choosing, Consolidating, and Optimizing Technology Investments

“CFOs are now faced with a dizzying array of choices when it comes to technologies that promise to transform how they do their job. How do they distinguish between what is just “noise,” and technologies that could really benefit their organizations?”

This requires an even closer partnership with technologists. Because, “If you don’t choose the right system, you’re not going to end up in the right place.”

The good news: “A lot of the manual processes within financial reporting that are fraught with risk and human error will be derisked, resulting in quicker and more accurate financial reporting. We’ll no longer be dependent on Excel spreadsheets.”

Read more: Global Finance Magazine https://www.gfmag.com/magazine/june-2019/cfo-future

Our take: We agree. Choosing purpose-built solutions that are up to the task of meeting specific needs within a well-conceived framework is key. Which is why Finario is laser-focused on capital expenditures (Capex). https://www.finario.com

Reorganizing for Agility

“Many companies still follow a traditional operating model in which dedicated finance professionals support specific areas of the business, with a focus on management reporting, budgeting and planning, and ad hoc analysis. Coverage for those business units may be guaranteed, but finance staff deployed in this way rarely have time to step away from their unit-specific tasks and help shape financial strategy for the business overall.

Moreover, this structure often keeps the finance organization from responding quickly when market forces require the business to change — as happens all the time. What finance organizations instead need is an agile operating model that encourages finance staffers to pivot to the business’s most pressing issues.”

Read more: McKinsey & Company https://www.mckinsey.com/business-functions/operations/our-insights/new-technology-new-rules-reimagining-the-modern-finance-workforce

Our take: Managing capital investments most certainly applies to this point of view. Capex is core to strategic growth and investment, yet many organizations – still reliant on manual tools on processes – are unable to react more opportunistically. https://www.finario.com/capex-resource-center/finario-capex-executive-briefings/

Real-Time Reporting and Rolling Forecasts

“Gone is the stigma of being a “dinosaur” in the back office, hunched over spreadsheets, toiling in obscurity as the rest of the business brings on bright shiny objects and exciting new skills. Finance likely will be faster, more agile, more collaborative, and more insightful than ever before – and its potential value contribution is only going to increase.”

Eight predictions are cited in this report, including: “Finance goes real-time: periodic reporting will be a thing of the past, allowing the rest of the business on-demand access to reports and forecasts; and, Automated operations will enable finance to “double down” on business insights and service.”

Read more: Deloitte / Forbes
https://www.forbes.com/sites/deloitte/2018/12/05/what-will-the-finance-industry-look-like-in-2025-eight-predictions-for-the-digital-age/#d17fce067c52

Our take:  Given the pace of business today, access to data, and competitive pressures, the move to rolling forecasts is inevitable. To make this possible, a Unified Capital Planning framework is essential. https://www.finario.com/capex-software/

Taking a VC Approach to Innovation

Eight disruptive technologies will transform all levels of existing finance competencies, according to a report by KPMG. These include cloud technologies, machine learning, robotic process automation, cognitive, blockchain, natural language processing, digital analytics and delivery, and data management.

“Nearly 70% of [survey] respondents said innovation efforts are funded through an annual budgeting process. However, innovation leaders in the business units are often frustrated by this approach, because by the time the annual cycle rolls around, the window for competitive differentiation has closed. Moreover, the traditional annual budgeting  process often favors legacy initiatives, building on the previous year’s plan, versus new investments that may be seen as risky or unproven.

A VC approach to innovation means enabling investment in the right project at the right time.”

Read more: KPMG
https://advisory.kpmg.us/content/dam/advisory/en/pdfs/2019/future-finance-report.pdf

Our take: This lies at the core of the strategic allocation of capital. It’s why Finario’s more advanced editions include portfolio views, with ROI analysis, and advanced planning features to make the smart reallocation of capital between budget planning cycles something you can do with confidence. https://www.finario.com/capex-software/

Consistency Counts

“The best capex strategy turns out to be a consistent and conservative investment approach that enables best-in-class value creators to maintain stable capex budgets over time. Equally important, the best-in-class companies follow three crucial practices before undertaking a major investment: they pursue less cash-intensive alternatives first, they avoid unnecessary market exposure, and they minimize timing risk.

Overall, the best strategy appears to have been to invest consistently over time: companies that adhered to this approach enjoyed a 13% higher average increase in ROGI and a 5% greater annual TSR than the others did.”

Read more: BCG
https://www.bcg.com/en-us/publications/2017/corporate-development-finance-large-capex-three-ways-beat-odds-capex-investments.aspx

Our take: Barriers to the consistent approach described here are disparate approval requirements, lack of proper governance, and missed opportunities to conduct post-completion reviews of projects for valuable learning. https://www.finario.com

Buybacks vs. Capital Investment

“Instead of rising, the absolute level of capex has declined in each of the last two years, even as the economy has continued to grow. In place of investments in new capacity, companies have used retained earnings and borrowed capital to buy back shares, offer special dividends and buy other companies. In fact, dividends now stand at about 60% of capex spending and buybacks at around 80%, whereas a little over a decade ago, each was under 50% of capex.

There’s no denying that financial engineering has worked; companies that have engaged in these practices have been rewarded with higher stock prices. Corporate management, therefore, has felt little market impetus to allocate capital to new plants and equipment.

But while industry generally is skimping on traditional capital investment, we see many manufacturers and other users of capital equipment making modest to significant investments in high-tech modernization and automation tools. Importantly, these high-tech investments are producing cash-on-cash returns in the high double digits over three to four years.”

Read more: PineBridge Investments
https://www.pinebridge.com/insights/investing/2017/09/a-new-capex-implications-beyond-the-bottom-line

Our take: favoring buybacks to capital investments can be shortsighted and detrimental to innovation, competitiveness, and growth potential. Smart capital investment, incorporating a Unified Capital Planning framework, delivers true shareholder value. https://www.finario.com/capex-software/

Taking a Portfolio Approach to Capex

“Companies that are applying discipline and science to the practice of capital allocation are already seeing significant improvements in their cash flows, and hence in their share prices.

[But] management teams often struggle to achieve consistent, positive returns because analyzing and optimizing capital expenditures is a complex task. It requires that management evaluate in some cases hundreds of investments, and prioritize them under a number of financial and nonfinancial constraints to decide which projects to fund, and in what order. The allocation process requires three elements: a robust valuation methodology, sophisticated optimization tools, and comprehensive governance process.”

Read more: Strategy+ Business
https://www.strategy-business.com/article/Theres-More-to-Earnings-than-Earnings-per-Share?gko=d1dc7

Our take: It’s difficult to imagine an allocation scenario like this being successful with manual processes and tools in place. With a system delivering a single source of truth across the capital planning lifecycle, however, anything is possible. https://www.finario.com/capex-software/

The Shift to Cloud-Based Solutions

“Shifting resources quickly can be critical when many projects are fighting for a fixed pool of resources. CareCentrix, a home health-care coordinator, has had, like other services providers in its sector, a relatively flat capex budget for years, says Steven Horowitz, the company’s CFO. For some capital expenses, Centrix has no choice but to greenlight them. For example, it has to invest in projects to comply with health-care regulations, Horowitz explains. “There’s no need to do an ROI; we just try to do what’s needed for the least amount of money,” he says.

“We look at the problem we’re trying to solve and how much variability we have in solving it,” says CFO Stillwell. For example, an ERP system is a 10-year problem that requires an upfront capital investment, he explains. But when investing in a new marketing automation solution, “where I have no clue what [the market] will look like 10 years from now,” Stillwell says, the answer is likely to be a SaaS product.

CFOs blend new and old techniques in a quest for capital budgeting solutions that allow more flexibility.”

Read more: CFO https://www.cfo.com/budgeting/2017/10/best-path-forward/

Our take: Choosing a cloud-based solution such as Finario not only future-proofs your technology investment, it also vastly simplifies the implementation process and (as a result) compliance/utilization. https://www.finario.com/technology/capex-cloud/

Data-Driven Decision Making

“72% of global CFOs admit that their capital allocation process should be improved.

[And], despite technological advances, 41% of CFOs say that insufficient data is a primary barrier to the optimal allocation of capital. Given the speed at which business is evolving, companies must seek new ways to understand what drives profitable growth – and then find ways to acquire data to measure these drivers.

EY provides eight leading practices for allocating capital, among them: take a zero-based budgeting approach to deploying capital; practice continuous improvement by examining each investment and implementing lessons learned; and, embed stress testing across capital allocation to strengthen resilience.”

Read more: EY
https://www.ey.com/en_us/transactions/capital-allocation-strategy-driving-shareholder-return?WT.mc_id=10778421&AA.tsrc=advertising

Our take: Providing the approval assumptions, forecasting histories, and essential reporting for post-completion review are all critical elements of an optimized capital allocation process. It’s why Finario is purpose-built for Capex, and provides all of these. https://www.finario.com/capital-planning-solutions/financial-planning-analysis/

 

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