The 7 Challenges of Capital Programming
At Alithya, many of our clients ask us to assess their capital programming processes – and we see similar challenges across organizations! We thought it would be fun to do a Top-7 countdown of these common capital programming challenges – and share some of the strategies we use to alleviate these challenges.
Let’s start our countdown of the Top-7 countdown Pains of Capital Programming!
Top-7 Pains of Capital Programming Countdown!
Challenge #1 – An Opaque Capital Investment Pipeline
Treasury and Finance have limited visibility into the longer-term needs of departments and business units. Finance only gets an annual glimpse during the capital request cycle when hundreds of requests surface and need to be quickly prioritized. It’s hard to understand, prioritize, and guide everything people ask for in a time-compressed period.
Ideal state: Departments continuously enter their capital needs into a sandbox – so departments can begin thinking strategically and build their own “mini-investment roadmaps.” During the capital cycle, a department can cherry-pick select requests and submit them for approval. If they’ve been working on their capital needs throughout the year, the capital prioritization process will be much smoother. And – at the same time - Treasury and Finance can aggregate sandbox information to look for themes, trends, and emerging needs.
Challenge #2 - Cross-Functional Teams Find Out About Proposed Investments Too Late
Without a system helping drive the capital program process, departments don’t always know who to involve in various capital requests and when to involve them. Often, support functions like IT, Facilities, or Purchasing get notified to ‘start work’ on a project that they had no input or visibility into.
Alithya has recognized a few real-world examples:
- A department receives approval to purchase a piece of equipment, but no one realized the Facilities Department needs to build out space.
- Two departments are soliciting approval to purchase the same item, but the Purchasing Department finds out too late – missing out on an opportunity to take advantage of better buying terms.
Ideal state: As capital requests are promoted out of a department’s sandbox, cross-functional teams get visibility to new requests via dashboards highlighting new, relevant requests. If there is a question about something new on the list – they can escalate their concern – or acknowledge that they have seen the request.
Challenge #3 – Capital Request Process is Not Real-Time
Too often, the capital request process runs annually, a capital program with a list of projects gets approved - and then the fiscal year starts a few months later. Often, business units, functions, and VPs are left to self-administer within their capital allotment contingencies. But, much like the previous two challenges – the rest of the organization is not getting a real-time view of the current capital need.
Ideal state: An annual request process establishes each function’s capital budget. A capital programming process should require all capital spend during the year – for items big and small – should follow a standard authorization process to authorize procurement.
Challenge #4 – Little Linkage Between Capital Pipeline and Organization’s Funding Capacity
As the organization thinks about capital improvements several years out, most do not have a formal methodology to look at the various capital structure and funding scenarios that drive the organization’s capital capacity.
Ideal state: Implement a capital funding capacity model to evaluate various scenarios to help set the capital program budget. Typical scenario modeling includes analyzing options such as adjusting fees, fundraising, issuing debt, or drawing from endowments. This scenario model will drive the capital budget limits within the annual request process and allow the treasury function to drive their capital-raising plan.
Challenge #5 – Capital Spending not Linked to the Organization’s Strategic Plan
Organizations need to make crucial decisions around large capital projects that will impact their finances for many years into the future. However, many organizations do not integrate their capital plan into their strategic plan, preventing them from forming a holistic understanding of the crucial impact these decisions have on their future financial statements and key metrics.
Ideal state: It is essential to provide a linkage into the strategic plan so that senior management can gain insight into how capital allocation decisions impact future cash flows and requirements for additional debt or bond issuances. Incorporating debt covenant calculations and credit rating metrics into the strategic plan can further understand the organization’s future debt and capital capacity. Integrating scenario analysis into the strategic plan around the inclusion/exclusion of unapproved capital projects and the timing of the cash outlays associated with these projects can help organizations optimize their mix of capital projects given their financial projections and associated constraints.
Challenge #6 – Incomplete Capital Requests and Surprise Budget Overruns
Often capital spend is not being prioritized and managed consistently – leading to the wrong projects being approved, projects going over budget, and not all capital costs for a project being estimated.
Ideal state: Define a consistent capital request, prioritization, and approval process that can be universally applied to the organization. Establish rules around how ‘routine capital’ and ‘strategic investments’ should be facilitated by a formal request process, an opportunity to prioritize, and an approval workstream within the organization. Determine when in the prioritization process, cross-functional teams such as IT, Facilities, and Purchasing should receive visibility into a potential investment.
Challenge #7 – The Process is too Manual – All in Excel, Word, and Email
Even the largest organizations manage the capital request process via Excel, Word, and Email – with Finance building up spreadsheets of requests. Once the capital program gets prioritized, approved, and project budgets issued – ongoing projects are often managed in Excel with finance managing budget transfers between projects, actuals vs. budget reporting, and placing assets into service.
Ideal state: A capital programming system should download open-POs (commitments) and paid-invoices (cash disbursements) from your procure-to-pay system nightly. This makes it easy for all stakeholders to see the real-time financial health of their capital projects – budget vs. commits vs. payments. If a project is going over budget, a department should submit a new incremental funding request so the organization can formally decide to continue to fund or terminate the project.
Through our focus on helping clients with this crucial business process – we have established Alithya’s Capital Portfolio Planning – a repeatable implementation that shortens the time it takes to address these challenges. By using the flexibility of Oracle’s EPM Planning tool, we can quickly implement a robust capital programming process.
SEE FOR YOURSELF!
If you’d like to see a demo of Alithya’s Capital Portfolio Planning - and how you can build Strategic Capital Pipelines, watch 📺our 3-part video series!
- An introduction to Capital Portfolio Planning and why it matters.
- A demo of the capital request, capital budget, and management processes.
- See a Strategic Capital Pipeline in action!
Thanks for reading!
To learn more about streamlining your capital programming process, please visit our solution page, read our solution brief or contact Alithya to request our capital programming assessment.
David Pabst @datapabst, CPA\CITP PMP is a Practice Director and Oracle Ace Associate in Alithya’s Oracle practice. In his role as Alithya’s Capital Portfolio Planning Product Manager, he works with clients looking to digitally transform their capital planning.
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