When you’re growing your startup, it’s easy to fixate on short-term challenges and goals.
How will you grow this year? What campaigns do you need to execute next quarter?
But in order to scale, you need to start thinking long term.
That’s where capital planning comes into play.
Capital planning is all about making strategic financial decisions for your company’s future and putting processes in place to implement them.
If you want to build the next unicorn, keep reading to learn more about what capital planning is and how to do it.
Table of Contents
What Is Capital Planning?
Capital planning is the process of outlining an action plan for the allocation and distribution of your company’s capital for several years into the future.
Other forms of financial planning (such as budgets, forecasts, and cash flow projections) tend to be shorter term, looking at the upcoming financial year or zooming in even further to the level of the quarter or month.
However, capital planning is a much more long-term process. It’s typically done for large-scale projects as opposed to day-to-day or monthly expenses.
For example, organizations engage in capital planning processes when they are interested in:
- Acquiring new companies
- Undertaking large-scale marketing campaigns such as rebrands
- Developing a new product and taking it to market
Why Is Capital Planning Important?
Business developments like rebranding or acquiring and merging a new company are, as you’d expect, expensive undertakings.
They can easily cost millions of dollars and take over a year to be completed.
Before you commit to a project of that size, capital planning allows you to answer questions like:
- Do we have sufficient capital to afford this project?
- What if the cost of the project increases?
- What opportunity costs are we missing out on?
- What other expenses in our business are expected to change during this time?
- What risks are involved in approving this spending now?
- How reliable are our revenue streams?
Without a well-developed plan for capital spending, you run the risk of running through your war chest and can find yourself unable to meet financial obligations like debt repayments.
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Who Is Responsible For Capital Planning?
Capital planning should be a collaborative process.
While, in most organizations, the CFO (Chief Financial Officer) will head up the project, the capital planning group should also consist of:
- CEO (Chief Executive Officer)
- Other finance executives
- Department heads (such as the Chief Marketing Officer)
Capital Planning – Important Terms
Capital planning is a fairly technical undertaking, and those skilled in the process will need to have a strong understanding of the following common terms.
Capital Planning Group
The capital planning group is the group of people responsible for managing the capital planning process.
They’re responsible for tasks like:
- Prioritizing and reprioritizing capital
- Seeking approval from the capital management committee
- Managing ongoing changes
- Vetting the proposed list of capital projects
Capital Management Committee
A capital management committee is a group of executives whose role is primarily to approve or decline projects and spending as proposed by the capital planning group.
Capital Request Form
This is a standardized form that includes all of the necessary capital project information so the planning group can accurately assess the pros and cons of the project and decide whether or not to seek approval from the capital management committee.
Capital Project Approval Process
Every company will have its own unique capital project approval process, and it may even use separate processes for different spending amounts.
In any case, the capital project approval process is a series of steps that must be fulfilled in order for a capital spending project to be greenlit.
Capital Project Drivers
The capital project drivers are essentially the main reasons or motivators behind a project’s existence.
Common examples include
- Obsolescence: Something in our business is obsolete. We need to update it to stay competitive in our industry. (Example: Netflix switching from DVDs to streaming)
- Growth: We need to achieve significant growth over the next X years. This project will help us do it. (Example: Hubspot acquiring The Hustle to expand)
- Regulatory changes: There are new regulations we have to follow. We need to change our processes and procedures to adhere to the new standards. (Example: Companies making changes to be GDPR compliant)
- Cost reduction or avoidance: Making a capital investment today will save us $X down the line. (Example: Semrush acquiring Backlinko to cut back on acquisition costs)
- Strategic alignment with business goals and objectives: Last year we set a goal to do X. In order to meet that objective, we need to perform this project. (Example: Sprout Social acquiring Simply Measured to align with their focus on data and analytics)
Operating (Routine) Capital vs. New Capital
Distinguishes between capital spending that requires explicit approval through the capital project approval process, and those for which approval can be automated or signed off on in bulk, provided they fall within dictated spending and project parameters.
Minor vs. Major Capital
A delineation between two types of capital spending, generally based on a dollar amount (though the risk may also be assessed).
In general, minor capital requests require a less extensive process and fewer hoops to jump through in order to receive approval.
Monthly Variance Report
A report that is provided to management that analyzes any variance between budgeted and actual project spending.
Monthly Capital Expenditures Report
This is a basic report issued by the finance team that details the capital that has been spent each month.
Its goal is to keep all group and committee members up to date.
Business Unit Leaders
Business unit leaders are the department heads (for example, marketing, sales, etc.) that sit on the capital management committee.
Finance
Finance team members that are involved in the capital planning group as well as the capital management committee.
For example, the CFO might sit on the management team, while a financial analyst supports the planning side.
Management Programs
Software platforms that help capital planning teams manage the entire process.
How to Do Capital Planning
Capital planning teams engage in the following activities:
Identifying Needs
The first step in any capital planning process is to understand and define the needs of the company.
This might start broad (e.g., revenue growth), but needs to be narrowed down to specific, measurable metrics (e.g., increase revenue by 20% in 12 months).
Determining Financial Impacts
This involves answering questions like:
- What happens if we don’t do anything?
- What costs are involved in this completing project?
- What other ongoing lifecycle costs will be accrued?
Financial and Scenario Modeling
The capital planning team must plan financials for the ideal scenario, but also prepare models for alternative situations that arise.
For instance, what happens if the cost of the project is 15% higher than estimated.
Can you afford the higher costs? What adjustments will you need to make?
Prioritization of Capital Requests
Capital planning teams rarely work on a single project.
They’ll receive multiple requests from different departments at any one time, so it’s their job to determine which projects are most critical to the business as it stands today, and prioritize spending accordingly.
Developing a Financial Plan
This includes forecasting financial aspects such as:
- Expected revenue
- Expenses
- Cash flow projections
- Potential implications of legal changes
- Source and uses of debt services
- Funding sources
Providing Visibility to Key Stakeholders
Throughout the capital planning process, it’s crucial that everyone involved (the members of the capital planning group and the capital management committee) are kept up to date with regular reports on spending, capital allocation, and project wins.
Conclusion
To be successful at capital planning, you’ll not only need to develop the skills we’ve discussed above; you’ll also need a capable financial planning and modeling platform by your side to help you assess various situations and provide accurate reports to your leadership team.
Don’t have one? Check out Finmark, we’re just what you’re looking for.
