Capital Planning

Capital planning is the process of identifying and evaluating an organisation’s capital needs and determining how those needs will be funded. This process is critical to an organisation’s success, as it enables planning for the long term and make informed decisions about investments in assets that will drive growth and competitiveness.

What is Capital Planning?

Capital planning involves identifying an organisation’s long-term investment needs, evaluating funding options, and allocating resources to different capital projects. In this context, capital refers to the resources needed to fund long-term investments in assets such as buildings, equipment, technology, and other infrastructure that are necessary for the organisation’s operations.

Capital planning enables management to plan for the long term and drive growth and competitiveness. This is achieved through a process of forecasting capital requirements, assessing funding options, and making informed decisions about investments in assets such as buildings, equipment, technology, and other necessary infrastructure. By carefully considering these factors, organisations can ensure that they have the resources to invest in key areas and achieve their long-term goals.

Why is Capital Planning important?

Capital planning is a critical process that helps organisations make informed decisions about how to allocate their resources to achieve their strategic goals and objectives as it:

Allows organisations to align their capital spending with their strategic objectives, ensuring that the organisation is investing in the projects that will have the most significant impact on its success.
Helps organisations manage their financial resources more effectively by enabling them to prioritise capital spending and allocate resources more efficiently.
Enables organisations to anticipate and plan for the future, ensuring that they have the necessary resources to sustain their operations and grow over the long term.
Is essential for compliance and accountability purposes, as many organisations are required by regulatory bodies or stakeholders to demonstrate that they have a sound financial plan in place to support their capital expenditures.

What are the Key Challenges of Capital Planning?

There are several key challenges that organisations may face when undertaking capital planning. Here are five of the most common ones:

Limited resources: Organisations may have limited financial or human resources available to support their capital planning process.
Complex decision-making: Capital planning involves complex decision-making, as organisations must weigh the costs and benefits of various investment options and prioritise projects based on their strategic importance.
Uncertainty and risk: Capital planning is often impacted by uncertainty and risk, such as changes in market conditions or unexpected events that can impact the financial or operational performance of the organisation.
Lack of data: Organisations may have limited access to data or information needed to support their capital planning process, such as accurate financial or operational data.
Stakeholder alignment: Capital planning requires buy-in and support from a wide range of stakeholders, including executives, investors, and operational teams, which can be challenging to achieve.
Competing priorities: Organisations may have multiple competing priorities that make it difficult to prioritise capital spending and allocate resources effectively.
Inconsistent processes: Inconsistent or inefficient capital planning processes can lead to errors, delays, and increased costs.
Limited visibility: Organisations may have limited visibility into the performance and progress of capital projects, making it difficult to manage and monitor progress effectively.
Technological limitations: Outdated or inefficient technology systems can hinder the capital planning process, making it difficult to access data or information needed to make informed decisions.

What is Capital Planning Strategy and Process?

The capital planning strategy and process can vary depending on the needs, budget, goals, and methods of each organisation. Generally, the activities involved in developing and implementing a capital planning strategy may include:

Investment Planning: The first step is to identify the specific goods and services that the organisation needs. This could be related to equipment, technology, real estate, or other items. In this step, relevant staff members identify specific items that are required, their quantities, and their priority.
Budget Process & Approvals: Once the goods and services have been identified, the organisation goes through a budget approval process. This process determines if the investment request is possible to approve in terms of cost within the fiscal year.
Investment Realisation: In this activity, the investment request is reviewed by a purchasing or investment group. A purchasing project starts once the request is financially approved by the group. The purchasing project then begins.
Forecast Management: The fourth activity involves gathering information and budget forecasting related to the goods and services needed. This includes providing an estimation of needs within the facility and individual departments, reviewing investments within the fiscal year, and forecasting towards the next fiscal year.
Follow-up & Evaluation: Once the investment is realised, it is important for the organisation to review the process and identify any areas for improvement. This includes making a retroactive review of the purchases made quarterly and yearly and following up on the result of the investment decision. Checking if the investment had the expected result, if further investments are needed, if the price estimation matched the end costs, and similar questions.

The detail and depth of these procurement and investment activities can be adapted to fit the organisation’s specific needs.

In addition to these activities, some organisations may also choose to implement additional processes and procedures to ensure that their procurement strategies are effective. These may include establishing internal policies and procedures to govern their procurement processes or developing training programs to ensure that personnel involved in the procurement process are adequately trained and prepared to carry out their responsibilities.

Can You Support Capital Planning with Software?

There are software solutions available that can support capital planning for organisations. These capital planning software solutions can help streamline and automate various aspects of the capital planning process, including budgeting, forecasting, investment tracking, and evaluation. If you would like to know more, we wrote an article specifically about capital planning software.

Some of the key features of capital planning software include:

Budgeting and Forecasting: Many software solutions offer budgeting and forecasting tools that allow organisations to estimate costs and plan investments based on their budgets.
Investment Tracking: Capital planning software can help track investments and monitor their progress over time. This can include tracking the status of individual investments, the amount invested, and any associated costs.
Reporting and Analysis: Solutions with reporting and analysis capabilities allow organisations to evaluate the performance of their investments and make informed decisions about future investments.
Collaboration: Software solutions enable teams to work together on capital planning projects and share information and data. As a result, capital planning solution can easily gather requirements across facilities and departments.
Integration: Capital planning software can integrate with other software solutions, such as accounting software and project management tools. These integrations have the ability provide a comprehensive view of an organisation’s finances and investments.

Using capital planning software can help organisations streamline their capital planning process, reduce costs, and improve the accuracy of their investment decisions. However, it’s important to choose a software solution that aligns with the specific needs and goals of the organisation.

If a capital planning software solution that supports your strategies and processes is compelling, you can continue reading about the PeRMit software solution.

Summary

Capital planning is a process that involves identifying and evaluating an organisation’s long-term investment needs and how to fund them. This article explains the importance of capital planning and outlines five key challenges that organisations face when developing a capital planning strategy. It also provides a step-by-step breakdown of the activities involved in capital planning, including investment planning, budgeting, investment realisation, and follow-up and evaluation. Additionally, the article discusses the benefits of using software to support capital planning. Ultimately, capital planning is crucial for organisations to plan for the long-term, make informed investment decisions, and drive growth and competitiveness.

Do you want to improve your long-term planning and decision-making processes through a streamlined software solution that matches your needs?