Capital planning

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 .

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.

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

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.

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.

Purpose of capital planning

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. 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.

Examples of Capital planning

• Developing long-term financial plans: Long-term financial plans are typically developed by projecting revenues and expenditures over a certain period of time. This type of planning helps to determine the amount of capital that will be necessary to finance operational and capital projects as well as to ensure that the organization has sufficient resources to meet its objectives.
• Establishing investment goals: Investment goals are set to meet the organization’s overall financial objectives. This includes assessing the risks associated with potential investments, setting a target rate of return, and determining the appropriate asset allocation.
• Budgeting: Budgets are an important part of capital planning. They provide the foundation for allocating resources, setting priorities, and tracking performance. Budgeting also helps to ensure that the organization has adequate resources to meet its objectives.
• Monitoring cash flow: Cash flow is an important part of capital planning. By monitoring cash flow, organizations can ensure that they are able to meet their financial obligations and take advantage of opportunities as they arise.
• Developing capital strategies: Developing a capital strategy is essential for successful capital planning. This involves assessing the organization’s capital needs and developing a plan to meet those needs. This includes assessing the risks associated with potential investments and developing the appropriate financing structure.

Advantages of Capital planning

Capital planning is an important part of any organization's strategy for success. It helps ensure that resources are used in a way that maximizes effectiveness and efficiency. The following are the main advantages of capital planning:

• It improves the efficiency of resource allocation by understanding the costs and benefits of different capital expenditures.
• It provides a systematic approach for assessing the potential returns from capital investments.
• It helps to identify and prioritize areas of investment, allowing for informed decision-making.
• It enables better forecasting of future cash flows and helps to reduce risks associated with capital investments.
• It helps to establish internal controls and policies to ensure that capital investments are managed effectively.
• It provides the necessary tools and data to assess the current and future value of capital investments.
• It helps to create a long-term vision for the company and set achievable goals.

Limitations of Capital planning

Capital planning is an important activity for organizations to manage and forecast their capital resources for the future. However, there are certain limitations that must be taken into consideration when planning for capital expenditures. These include:

• Forecasting accuracy: Forecasting capital needs can be difficult due to a number of variables, including changing economic conditions and the unpredictable nature of markets. This means that even the best-made plans can be wrong, and organizations must be prepared to adjust their plans accordingly.
• Time constraints: Capital planning typically involves a lot of research, analysis and decision-making, which can take up a lot of time and resources. As a result, organizations may not have the time or resources to adequately plan for the future.
• Unforeseen events: Unexpected events, such as natural disasters or sudden changes in the economy, can put a strain on capital resources. Organizations must be prepared to adjust their plans in order to account for these unforeseen events.
• Political risks: Political risks, such as changes in government policy or regulations, can significantly affect capital planning. Organizations must be aware of any potential political risks and plan accordingly.
• Cost of capital: The cost of capital is often a significant factor in capital planning and can have a major impact on the success of a project. Organizations must accurately estimate the cost of capital in order to ensure that the project is feasible.

Other approaches related to Capital planning

Capital planning involves a range of activities that manage and forecast capital resources for the future based on organizations’ plans. These activities include:

• Human capital planning, which involves forecasting and managing the resources needed to meet an organization’s staffing needs. This includes recruiting and training personnel, assessing the skills needed for current and future roles, and developing career paths.
• Research and development planning, which involves creating strategies to ensure the success of an organization’s research and development projects. This includes budgeting, developing timelines, and monitoring progress.
• Revenue stream planning, which involves creating strategies to ensure the organization has a steady income. This includes creating new revenue streams, diversifying income sources, and managing customer relationships.
• Capital expenditure planning, which involves creating strategies to ensure the organization’s capital investments are allocated properly. This includes developing capital budgets, forecasting future capital needs, and assessing potential return on investments.

In summary, capital planning is the process of managing and forecasting capital resources for the future based on an organization’s plans. It includes activities such as human capital planning, research and development planning, revenue stream planning, and capital expenditure planning.

Footnotes

Capital planning — recommended articles

Business plan — Principles of financial planning — Strategic trajectory evaluation — Strategic management functions — Strategic planning functions — Strategic control — Importance of strategic management — Organizational planning — Planning

References

• 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