Capital Planning: Growth

In the capital planning process:

• Identify investments and the dollars that are required to support those investments.
• Identify the ROI of your investments. For growth capital, you need to invest in activities or capacity that will expand your business, geographic footprint, and/or products or services.
• Evaluate and prioritize options for your capital expenditure dollars. To prioritize, understand where each option fits into your mission and vision for the company and the strategic plan.

As you decide which capital expenditures to undertake, ask:

• Is now the right time for the project?
• Are we going to get the biggest ROI?
• Is there a safety or other compliance issue, or some other type of deadline?

All of those have requirements for capital in your business because they’re very large expenditures and they’re going to require some level of planning, prioritization, and ROI evaluation.

Here’s a little bit about the steps for effective capital planning, which will set the stage for the whole process:

• Your plan needs to be grounded in reality and achievable (you can’t say you’re going to grow 300% in one year when the previous three you’ve grown 50%). 
• You have to evaluate where you are currently and where you’re headed in your strategic plan, then what’s needed to attain that goal or target.
• Use your 3-5 year strategic plan to drive the capital planning process. This will define your priorities, the timing of these expenditures, and how much is being expended at any point in time.
• Use financial modeling to quantify the impact of the capital expenditures and answer the questions about timing.
• Do a scenario analysis to understand the impact of all the potential what-ifs.
• Select projects and implement the plan. This is the stage where you mobilize money and start rolling things out.
• After the project is done, measure your ROI. What happened? Did we get it right?

Capital Planning: Facilities & Maintenance

Capital planning for facilities and maintenance is typically done for larger companies. Larger companies (and educational institutions) often have very large capital planning budgets, large needs, and large scale projects. We’re looking at companies with physical locations, maybe warehouses or manufacturing facilities, plants, vehicle fleets.

When we talk about facilities and maintenance, facilities require both capital expenditures and maintenance expenditures. What’s the difference? Maintenance expenditures are expensed as a normal course of business. Repairs and maintenance type spending are expenditures that go towards sustaining your current revenue and profits. You want to make sure you’re following your preventative maintenance schedules so you don’t have a catastrophic failure down the road that shuts everything down and you can’t deliver to customers. So let’s keep on schedule and let’s make sure that those preventative maintenance activities continue to happen. Relative to capital expenses, these expenses should be pretty minor.

If you’re totally changing the life and longevity of a particular asset, beyond routine maintenance, that’s a capital expenditure. You’ll want to make sure you plan for that as you’re looking at your maintenance budget and facilities.

For example, say you’ve got something safety-related with OSHA that needs to be done ASAP for compliance reasons, or for compliance with a new law going into effect. You need to make some capital improvements to fall into compliance with that. That needs to be in your capital planning. Typically, these types of investments either have a very low or no return on investment because they’re required, they’re safety related, they’re compliance related. They’re not really doing much for the business other than allowing you to continue on. They’re sustaining capital expenditures.

You’re sustaining your current level of revenue and profits by making these investments in your business. So think of it as a reinvestment in your business to enable you to continue to make the same revenue and profits that you had made in the previous years that you were manufacturing or selling these particular items.

That’s a big differentiator versus the growth capital. Growth capital is obviously related to growing your business. The capital that sustains your business also needs to be budgeted for in your capital plan, and your business needs to have this reinvestment happen in the company to sustain revenue and profits, as well as be in compliance with the laws.

Capital Planning: Cash Flow Budget

Cash flow budgeting for capital planning is one of the most forgotten pieces of your capital budgeting, but it’s really important. Every year, people assume that they’ve got everything covered when they’re doing cash flow planning because it’s coming from operations. So when you prepare your budget, you’re just looking at: what does your income statement say? What are your revenues? What is your gross profit? What is your net income on the bottom line?

That’s awesome. But the piece that is forgotten every time is what cash is required from your operations to support the capital plan. What did your strategic plan say you were going to invest in? Growth capital and maintenance capital/sustaining capital all have to be paid for. What are the resources you’re going to have for this? That’s why cash flow budgeting is a part of capital planning because it’s cash and resource intensive.

Where is the cash going to come from to fund the investments that you need for your business, either for sustaining your business or for growing your business?

Well, for the most part, there are two sources for cash related to capital.

You can get cash internally generated from your business — cash from operations. The other source is external or other people’s money (OPM). OPM could be in the form of borrowing from a bank, it could come from investors, it could be equity, it could be just loans from investors. It doesn’t really matter, but you’re still going to have to pay it back, right?

With external funding sources, you’re typically going to have a return expectation from folks in the form of either interest, ownership, and/or equity. With internal funding, you should still have an expectation that you’re going to achieve your plan and create an ROI on the project, whether you’re adding more to the bottom line or expanding your sales.

How do we plan the funding of the capital expenditure outlays?

These projects can sometimes span years, so we need to make sure to take that into account. They can be so large that maybe you need a combination of funding. Whatever the split is, make sure you account for them in how they’re going to be timed. You need to know at a pretty granular level, maybe at the month level, when you need to have certain things funded.

Time out the expenditures and model that in your cash flow budget. Map out expenditures and when you expect the timing of them to take place. You’ll probably need to work with your capital planning folks or facilities folks to understand the timing, vendors, vendor payments, and contracts.

The other thing is this whole cash flow budgeting process needs to be in alignment with your strategic plan’s priorities and the resourcing. Don’t include projects that don’t align with your priorities, and make sure you understand which projects need to get done first. When do all of these start? When do you start laying out the money or drawing down the loans? When do you have to have all of those things in place so that you can move this forward and also complete it in a timely manner so that your profit and loss statements start reflecting the profits from these projects being implemented?

As you go ahead with growth-related hiring, after you’ve figured out the roles you need, the market value for those roles, and the job descriptions for the roles, you’re going to need to do an interview process. Do you need peer group interviews? Do you want them to meet the team? Do you want them to do interviews with multiple people in leadership? What’s important to the people already on your team? What does your culture dictate?

Think about the things that will attract people to the company, in terms of hard benefits, soft benefits, and compensation. Think about the recruiting tools you’ll use (like recruiters and job sites). How do you get the word out most effectively? These are all important things to take into consideration as you grow your company and face this growth-related people planning aspect.