Investment projects frequently experience cost overruns and delays, and the blame is frequently placed on the decision-makers who are forced to deal with constant changes during the planning process. Key problems include things like timing and cost forecasts. Costs may also increase further if there is insufficient discipline among departments.
Although not all CFOs have direct responsibility for CapEx processes, they are significant stakeholders and play a crucial role in selecting investments. CFOs must be given the responsibility of ensuring that capital budgets are in line with overall business expenditure goals. This is why it’s important to keep the CFOs informed because they can have a big impact, especially in a business that frequently manages multiple projects at once.
Setting a Standard when Assessing Projects
Often, issues begin during the proposal phase. Solving an issue or mitigating project risks becomes challenging while working on complicated projects that are frequently expensive to construct. The cause? Throughout the development process, there is a lack of standardization. When projects are compared, it is easier to weigh the benefits of funding one over the other, anticipate internal obstacles, and identify inefficiencies. A comparison model allows for the setting of precedents, visibility of various investment possibilities, and improved decision-making.
CFOs must contribute positively. To assess the value of different projects, there needs to be a common model for projects. For important outputs and assumptions about exchange rates, inflation, capital costs, and product prices, there needs to be a set rule and parameter.
Each proposal must illustrate predicted direct benefits in terms of money as well as expected indirect benefits, such as lowering risk during the project’s lifecycle or preventing loss. Although a more thorough examination may be required, the effort will shed light on the true worth of each project and enable early modifications. Additionally, internal teams will understand the importance of carefully and thoroughly developing their proposals, which will ultimately pay off.
The CFO’s role should also be to build and govern a holistic view of all projects as a single portfolio. This is an important step that provides insights for allocating capital. The goal needs to be as transparent as possible for projects to be comparable. They need to show value to enable management to make informed decisions on where capital should be shifted.
Dedicating a Team to Manage Capital Portfolio
A significant capital portfolio’s “scrubbing” refers to a close examination and improvement, which calls for more dependable resources and capabilities than an ordinary ad hoc approach. A committed group of people can assist. A CFO could, for instance, influence the investment committee. The committee also needs a member like a COO or corporate project manager by their side, however, this need not always be the case. The business case for each project should include input from finance as well.
Making stakeholders more responsible requires enhancing and standardizing the process. The committee can broaden its duty to assess each project’s overall case by reviewing current mechanisms for on-time and on-budget performance now that a process for doing so has been established. After a project is finished, the executive committee has to be able to examine the project’s entire business case to determine whether it met expectations.
In Conclusion…
Only a small portion of planned initiatives often survive after being scrubbed. When the specific investment is fully understood, Capex requirements are reduced. Reviewing the portfolio of capital projects is made simpler if the CFO joins the discussion. Savings and decisions on which projects to pursue and which to drop can only be made at that point.
A variety of assessments are used to determine how much capital should be committed and how much should be removed from the balance sheet. The measurements being used to gauge success must be kept a secret from the CFO. A project’s viability should be thoroughly understood, and constant assessment is necessary to make truly thoughtful decisions about CapEx planning. Project owners should hold regular meetings to discuss the portfolio’s performance, how money is being spent, and whether the organization will see returns. Reviews give you and the CFO the chance to adjust the capital budget and cancel underperforming projects.
Do you have complete visibility into each investment portfolio? If you do, you will be better able to make smarter investment decisions.
