Capital planning

Capital planning
Primary topic
Related topics
Methods and techniques

An activity of managing and forecasting capital resources for the future based on organizations’ plans. Capital planning includes such activities as human capital, research and development, revenue streams and other capital expenditures.

Capital planning is essential part of any planning activity regardless organizations' size and purpose. Sanchez and Hass (2018), insist that in circular economy early phase capital initiatives should have differen stages, decision point and proper planning methods [1].

There are number of various research from in different industries and sectors have investigated and proved the criticality of the pre-project planning phase including capital planning[2][3][4][5][6].

Sanchez and Hass(2018), proposed a new capital planning framework suitable for closed cycle construction project. The main argument in favor of new framework is that capital project planning should shift from linear to circular economy as environment around us has transformed under pressure of new technologies.

Capital planning in Banking industry[edit]

During 2008 financial crisis, banks learned a lesson to improve the quality of the capital planning. According to Bank for International Settlements research, there are four major pillar of capital planning for banks including internal controls, risk management and capital policy, forward-looking approach and capital protection[7].

Capital planning for banking sector is evaluated by the regulators to make sure bank capital structure will not lead to a bank’s default in case of any market fluctuation. For this purposes, some of the banks implemented the stress testing and independent model reviews when they evaluate the firm's capital by simulating various hypothetical situations[8].

Purpose of capital planning[edit]

Capital budgeting is an action when an organization defines the long- mid- term assets and investments(e.g. equipment, new factory, machinery, buildings and land, research of new things, improving the existing solutions, etc.) Company decide whether it worth acquiring to support the firm’s operations and goals of the organisation and whehther expendetures fit into strategic planns[9]. The kind of activity has an operational and long-term strategic importance since capital expenditures usually represent a significant commitment of financial resources which remain invested over a long period of time[10].

Footnotes[edit]

  1. (Sanchez and Haas, 2018)
  2. (Cho, 2000)
  3. (Ballard, 2000)
  4. (Bingham and Gibson, 2017)
  5. (Johansen and Wilson, 2006)
  6. (Morris, 2011)
  7. (Bank for International Settlements, 2014)
  8. (Bank for International Settlements, 2014)
  9. (Kim & Farraguer, 1981)
  10. (Kimbro and Wehrly, 2016)

References[edit]

  • Atkinson, R. and Ezell, S. (2012) Innovation Economics: The Race for Global Advantage. Yale University Press.
  • Ballard, G., (2000). Lean project delivery system. LCI white paper #8. Lean Construction Institute, 6.
  • Bank for International Settlements (2014).A Sound Capital Planning Process: Fundamental Elements.
  • Bingham, E. and Gibson, G.E. Jr., (2017). Infrastructure project scope definition using project definition rating index. Journal of management in engineering, 33 (2), 04016037.
  • Cho, C., (2000). Development of the project definition rating index for building projects. Doctoral dissertation. The University of Texas at Austin
  • Johansen, E. and Wilson, B., (2006). Investigating first planning in construction. Construction management and economics, 24 (12), 1305–1314.
  • Kimbro, M. B., & Wehrly, E. W. (2016). Capital Planning, Selection, and Investment: Integrating Sustainability in Decision-Making. Journal of Management for Global Sustainability: 1–24. DOI: 10.13185/JM2016.04103.Capital
  • Kim, S. H., & Farraguer, E. I. (1981). Current capital budgeting practices. Management Accounting, 6: 26–30.
  • Morris, P.W.G., (2011). Managing the front-end: back to the beginning. In: Project perspectives 2011. Finland, Helsinki: International Project Management Association. Vol 18, ISSN 1455-4178, pp. 4–8.
  • Sanchez, B. and Haas, C. (2018). Capital project planning for a circular economy. Construction Management and Economics, 36(6), pp.303-312
  • World Bank Group (2017). Roadmap for a sustainabl efinancial system. A Un Environment - World Bank Group.

Author: Mariia Gordiyenko