Best company response
Companies that apply best practices realize their strategic goals by judiciously crafting the capital budget as an extension of strategy. Strategically driven investment ensures the efficient allocation of precious capital, effectively bringing to life the company's vision for the future. Passing all capital requests through a strategic lens ensures leading companies that the capital budgeting process supports the goals defined by the board, senior management, and corporate planners. Aligning capital planning with strategy requires careful integration of company finances to achieve an efficient financing structure that supports the business within a defined risk tolerance. Driving decisions with analytic data minimizes the risk of overoptimistic investments that cannot achieve intended goals. Best practices companies also wield the capital budget to solidify their competitive position to deter competitors from vying in the same arena. These companies:
A manufacturer of specialty steel and alloys for a variety of industrial, aerospace, defense, and medical applications rigorously adhered to established financial metrics to determine the initial and continued funding of projects. The company defined a hurdle rate according to the fundamental nature of the product. For example, if the company could control most cost variables, a 15 percent hurdle rate applied. For projects in which market risk or competitive pressure was high, the company assigned a rate of at least 20 percent. The company tracked results to ensure that the investment achieved initial ROI estimates for at least two years after completion. By dropping investments that failed to achieve those expectations, it realized a return on gross fixed assets (ROGFA) of 58 percent.
Measures of success:
Companies that apply best practices realize their strategic goals by judiciously crafting the capital budget as an extension of strategy. Strategically driven investment ensures the efficient allocation of precious capital, effectively bringing to life the company's vision for the future. Passing all capital requests through a strategic lens ensures leading companies that the capital budgeting process supports the goals defined by the board, senior management, and corporate planners. Aligning capital planning with strategy requires careful integration of company finances to achieve an efficient financing structure that supports the business within a defined risk tolerance. Driving decisions with analytic data minimizes the risk of overoptimistic investments that cannot achieve intended goals. Best practices companies also wield the capital budget to solidify their competitive position to deter competitors from vying in the same arena. These companies:
- Strive to fund only strategically relevant investments.
- Drive decisions with solid data.
- Fund strategic investments by selling nonstrategic assets or businesses.
- Deploy capital to influence competitor behavior.
- Align capital planning with capital structure and risk management.
A manufacturer of specialty steel and alloys for a variety of industrial, aerospace, defense, and medical applications rigorously adhered to established financial metrics to determine the initial and continued funding of projects. The company defined a hurdle rate according to the fundamental nature of the product. For example, if the company could control most cost variables, a 15 percent hurdle rate applied. For projects in which market risk or competitive pressure was high, the company assigned a rate of at least 20 percent. The company tracked results to ensure that the investment achieved initial ROI estimates for at least two years after completion. By dropping investments that failed to achieve those expectations, it realized a return on gross fixed assets (ROGFA) of 58 percent.
Leading companies monitor capital planning effectiveness by tracking performance measures such as:
- Percentage change in market share
- Percentage of capital budget devoted to nonstrategic investments
- Percentage of investments dropped because of poor financial results
- Frequency of divestitures or outsourcing of nonstrategic assets or services
- Percentage of capital investments that prompt modifications to risk management and capital structure
- Percentage of capital allocated to provoke changes in competitor behavior
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