More about Capital Budgeting
Decisions made today impact the future, and we all know the adage “fail to plan, plan to fail”. Capital Budgeting has become ever more complex, time sensitive and essential to manage effectively. Executives need the ability to adapt to today’s fast-moving environment where annual budgeting cycles are no longer practical and re-prioritizing projects is necessary as competitive and compliance pressures arise.
SAP has long supported Investment Management functionality, but this has not been well adopted due to the poor user-interface of the SAPGUI. SAP Fiori is the new, more intuitive and easily accessible way that SAP customers are accessing SAP Functionality. By leveraging SAP Fiori, organizations are eliminating external spreadsheet, form and workflow technologies, to provide executives with a simpler, more effective and efficient solution for evaluating and approving capital projects.
The following topics can help guide you in controlling capital budgets to achieve strategic outcomes and a return on investment.
What Is Capital Budgeting?
Capital budgeting is the process an organization goes through to select their long-term capital projects and investments. Through the effective allocation of human and capital resources, companies prioritize capital projects to sustain and grow the organization for future success.
Webinar: Controlling Capital Budgets with SAP Fiori
This 30 minute webinar offers actionable insights into how you can leverage the SAP Fiori user-experience and your current SAP technologies to optimize capital project portfolio selection and execution. Discover how to achieve your strategic objectives sooner and more cost-effectively.
The Importance of Capital Budgeting
An organization’s long-term success is based on its ability to select an optimal portfolio of capital project investments. Utilizing a modern capital budgeting process companies can gain numerous advantages:
- Increased agility to respond to environmental changes
- Improved accountability and governance of projects
- More robust evaluation of risks and returns
- Reduction in cost from a more formal assessment of options
- Greater strategic alignment of long-term investments
- More confident and fasters decisions based on real-time and reliable data
Due to destabilizing effects of rapid technology change, war, pandemic, and climate change organizations are increasingly aware that disconnected systems and processes are simply not appropriate. Executives are rapidly transforming their capital budgeting process with much more dynamic, seamless and integrated solutions leveraging the power of SAP Fiori and their core SAP systems.
The Capital Budgeting Process
The key steps involved in an effective capital budgeting process are:
- Project Definition – including options, benefits, risks and investment required
- Evaluation – using standardized evaluation criteria to reduce subjectivity
- Selection – ranking and optimizing the select of projects given resource and capital constraints
- Execution – delivering successful projects aligned to business case
- Validation – assessment and review of the completed project for continual improvement
Whilst the impact of operational expenditure (Opex) is felt in the current fiscal year, the value of capital expenditure (Capex) is realized over multiple years. Read more about Capex Vs Opex.
Most organizations prepare detailed Opex budgets for each cost center and monitor these closely on a monthly basis. Capex budgets, however, are harder to manage, as the profit and loss impact in the form of additional depreciation is only recognized in future fiscal periods.
Capital project budgets are typically allocated on an annual basis to a wish-list of initiatives. During the year, these budgets are then formally allocated to specific project initiatives based on more refined business-cases and approval by senior executives.
Many large organizations still prepare these annual budgets in spreadsheet tools and approve capex requests via non-SAP forms and email. Business cases are often error-prone and competing-projects are difficult to compare.
Because of poor systems, large capital projects are frequently either delivered sub-optimally, or are never initiated at all. Poorly conceived, planned and monitored projects end-up over-budget, being delivered late, or fail to deliver expected benefits. Failure to identify and commission critical sustenance and growth projects can result in catastrophic actual and opportunity costs.
Learn more about How Capital Projects Fail
Making Capital Budget Decisions
Capital allocation decisions are a key responsibility of executive managers acting on behalf of shareholders. Capital projects are motivated for several reasons including achieving sustenance, growth, saving, compliance, safety, environmental, and strategic objectives. The decision-making criteria and data collection requirements will vary by the nature of the investment.
For example, asset replacement initiatives will be prioritized by operating risk of delayed replacement. Growth projects will be assessed in terms of NPV. Environmental projects may be assessed in terms of greenhouse gas emission reduction.
Executives are required to demonstrate probity in their decision making, and most organizations require several key approvals before any significant commitment of corporate resources. Enforcing the delegation of authority policy, and retaining the audit trail of approvals granted, are essential features of a modern solution.
A key consideration of executives is risk. Both the risk of not doing (omission), as well as the risk of doing (commission). These risks are often described as the urgency of the project, and the confidence of delivery. These risks can be captured in the Fiori app for assessment by the decision makers.
Executives need the ability to adapt to a changing environment. Project portfolios are very seldom executed as planned a year in advance, and it is important to be able to re-prioritize and substitute projects as competitive and compliance demands arise. A centralized repository of the planned project portfolio enables this dynamic project portfolio management.
As part of their fiduciary responsibility, executives are required to forecast and effectively monitor the successful delivery of capital projects that they’ve approved. This reconciliation of budget versus actual and forecast expenditure is best tracked directly in the core SAP system, and not via external spreadsheet compiled monthly.
Significant capital projects are commercially sensitive, and the security and confidentiality of project proposals must be carefully preserved. SAP authentication and authorization is the optimal approach to protecting this information.
Today’s Capital Budgeting Challenges
Annual budgeting cycles are no longer practical in today’s fast-moving environment:
- Inflation is impacting the likely cost and anticipated benefits of project portfolios.
- Rising interest rates are directly impacting both the source of funding and net present value calculation of returns.
- Supply-chain bottlenecks are causing extended delays to project delivery, with most planning cycles now incorporating a significant proportion of carry-forward items.
- Energy costs are impacting the selection of technologies and location of facilities.
- Labor shortages on both the business and technical delivery side of projects are directly impacting the scheduling and prioritization of project.
- Environmental, Social and Governance (ESG) objectives are making the evaluation and scoring of initiatives more complex.
Conflicting Priorities of Capital Budgets
Alignment of projects to current strategic objectives for the benefiting area are an essential dimension to the effective optimization of the project portfolio.
Depending on the sponsoring department and project investment reason, tailored ranking models will need to be applied.
There are new stakeholders impacted by capital budgeting decisions including environmental commitment, societal obligations, and governance improvements.
Alternative options to delivering on an identified risk or opportunity need to be more carefully assessed and scored.
Decision making can no longer be based on a single metric such as Net Present Value (NPV) or payback-period but may need to include scoring related to greenhouse gas emissions, safety metrics, or progress on sustainable development goals.
A standardized approach to business case development will help provide confidence and transparency to the budgeting process and eliminate bias in the effective allocation of corporate resources.
Conflicting Priorities of Capital Budgets
Alignment of projects to current strategic objectives for the benefiting area are an essential dimension to the effective optimization of the project portfolio.
Depending on the sponsoring department and project investment reason, tailored ranking models will need to be applied.
There are new stakeholders impacted by capital budgeting decisions including environmental commitment, societal obligations, and governance improvements.
Alternative options to delivering on an identified risk or opportunity need to be more carefully assessed and scored.
A standardized approach to business case development will help provide confidence and transparency to the budgeting process and eliminate bias in the effective allocation of corporate resources.
Decision making can no longer be based on a single metric such as Net Present Value (NPV) or payback-period but may need to include scoring related to greenhouse gas emissions, safety metrics, or progress on sustainable development goals.
The Benefits of a Seamless Capex System
- Accelerate the end-to-end process through complete digital transformation of all stages based on real-time access to a single source of truth, and instant workflow routing and approval.
- Lower costs by thoroughly considering and evaluating options to achieving desired outcomes as opposed to single-row default proposals.
- Maximize returns by ensuring that business cases are consistently produced and fairly evaluated on common planning assumptions and standardized calculations.
- Mitigate project execution risk by providing real-time project performance analytics to enable timely mitigating interventions to occur.
- Mitigate technology risk by leveraging a single core technology platform (SAP) with all the security, reliability, and supportability of your primary Enterprise Resource Planning platform.
How SAP Fiori is Transforming Capital Budgets
The key constraint to further adoption by organizations of available SAP Investment Management functionality has always been the user-experience of both initiators and executive approvers. By leveraging SAP’s UI5 ‘Fiori’ mobile web application technology, this user-interface can be radically transformed.
How SAP Fiori Supports Digital Transformation
SAP Fiori eliminates the need for alternative tools for budget appropriation and authorization for expenditure requests, such as SharePoint, ServiceNow and other bespoke form and workflow technologies.
SAP Fiori provides a user-friendly interface directly from and to SAP as the single source of truth. SAP Fiori’s intuitive user-interface has built-in validations to reduce manual errors and increase data reliability and input-efficiency.
Automated digital workflow implemented within SAP enables consistent approval routing, with serialization able to dramatically increase the speed of approval.
Seamless integration with SAP master data such as projects and assets, and the orchestration of planning and budgeting transactions, ensures the accuracy and consistency of data for more reliable analysis.
Systematic support reduces the amount of human-glue required by capex controllers to validate submissions, administer the approval process and manually update SAP. With an integrated SAP Fiori solution, controllers can instead focus on strategic outcomes and maximizing the return on investment.
Learn more about Accelerating Capital Expenditure Digital Transformation
Limitations of Standard SAP Fiori Apps
What about standard SAP Fiori apps? The objective is to leverage SAP standard Fiori apps wherever possible, and to have a blended suite of customized apps and standard apps on an easy to access Fiori Launchpad.
The differences between standard SAP Fiori apps and IQX Apps are outlined below:
- Standard Fiori apps trigger a single transaction. By contrast, IQX apps orchestrate multiple SAP transactions. For example, the approval of a Capex request, can result in the creation of a project, the distribution of budget, detailed cost planning and status updates.
- Standard Fiori apps trigger an instant update. IQX apps enable data input, facilitate collaboration, review and approval, and only then trigger SAP transactional updates.
- Standard Fiori apps map directly to SAP fields and functionality. IQX apps are extensible to incorporate additional classifications and justifications. For example, IQX apps can capture greenhouse gas emission data for comparative evaluation purposes.
- Freestyle development and customization of SAP standard apps requires specialist technical resources. IQX app configuration is done using IQX’s SAP-certified low-code platform to ensure rapid, high quality and supportable tailoring of both the user-interface and workflow process.
Learn more about Building SAP Fiori Apps
The differences between standard SAP Fiori apps and IQX Apps are outlined below:
- Standard Fiori apps trigger a single transaction. By contrast, IQX apps orchestrate multiple SAP transactions. For example, the approval of a Capex request, can result in the creation of a project, the distribution of budget, detailed cost planning and status updates.
- Standard Fiori apps trigger an instant update. IQX apps enable data input, facilitate collaboration, review and approval, and only then trigger SAP transactional updates.
- Standard Fiori apps map directly to SAP fields and functionality. IQX apps are extensible to incorporate additional classifications and justifications. For example, IQX apps can capture greenhouse gas emission data for comparative evaluation purposes.
- Freestyle development and customization of SAP standard apps requires specialist technical resources. IQX app configuration is done using IQX’s SAP-certified low-code platform to ensure rapid, high quality and supportable tailoring of both the user-interface and workflow process.
Learn more about Building SAP Fiori Apps
SAP Fiori for S/4 Hana and SAP ERP
Most SAP customers have either commenced or about to commence an S4 project. The user experience technology is Fiori for all SAP technologies going forward.
Your strategic investment management platform should therefore leverage this technology. And you don’t need to wait for S4/HANA. IQX Apps work with current ECC, ERP and S4/HANA application servers.
Choose IQX CAPEX for your Digital Transformation
IQX CAPEX is an end-to-end, powerful and flexible Capital Budgeting and Expenditure Management solution. As the leading SAP-based capital expenditure solution on the market, IQX CAPEX is delivering a better return on investment and greater efficiency to finance teams around the world.
Start your CAPEX transformation journey today: