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Practical. Applicable. Inventive. |
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Hill Management Consulting |
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Why do Capital Planning?
There are two reasons companies don’t do capital planning: 1) they think they are too small, or 2) they ask “why should I plan to spend money I’m not sure I’ll have?” But even without a plan you’ll spend money. Are you confident you’ll spend it on the things most material to future profitability?
Failure to plan virtually assures scarce resources will be consumed ineffectively. Even worse, critical equipment, infrastructure or facilities will deteriorate or not materialize. Capital planning helps you think through economic development and financial decisions and may avert expensive mistakes.
The elements of a capital plan include: 1) an inventory of present physical assets, 2) a maintenance and replacement schedule and 3) a time-table and estimate of future needs. Capital expenditures are usually large purchases (consider a guideline of $1,000 or more) with a useful life expectancy of over 1 year (consider setting a minimum of 3 years).
A complete financial analysis of historical revenues and expenditures helps you understand and balance revenue and spending patterns. Using historical data, knowledge of market trends and current plans, forecast sales for the year. Do you have the production capacity, equipment, infrastructure and facilities to meet this forecast? If not, what would you need to purchase, by when, to be prepared? Plan those purchases based on your projected cash flow, and secure financing well in advance.
Capital planning is a common-sense approach to making the right investments at the right time. The key is to manage both cash flow and debt. A little planning now ensures when you look back on what you spent this year you’ll feel good about your decisions.
© 2006, Andrea M. Hill
Originally written for Rio Grande’s “Artisan’s Quarterly” |