Case Study: Capital Investment Strategy
How we helped a national retailer implement a refined capital expenditure strategy to deliver streamlined proposals, improved decision making, and significantly improved return on invested capital.
Project Impact
Client Challenges
The client lacked the tools, process, and policies to make rapid, informed decisions regarding capital investments. As a result, many poor investment decisions were made leading to low returns and inhibiting growth.
Inefficient Approval Processes
Capital projects were approved via an email chain between team members and were not stored in a central location. Inefficiency, delayed approvals, and redundant email communication resulted in the inability to capitalize quickly on quality opportunities.
No Reporting or Performance Tracking
The client lacked the capability to confirm that capital projects were being completed in line with the approved investment amounts. Once a project was done, there was no tracking in place to gauge the success of an investment.
Poorly Built Financial Models
The client utilized one basic financial model to analyze all growth oriented capital projects. The financial model omitted several key assumptions which led to unrealistically high projections and poor investment decisions.
Undefined Capital Policies
No capital expenditure policy was in place to guide investment decisions. There was frequent uncertainty around which functional group’s budget capital projects were to count towards and who was ultimately accountable for the investment.
The Collaborative Solution
During an engagement lasting over a year, we worked with client leadership to completely reinvent their capital investing process and policies, leading to significant improvements in decision making efficiency, project payback period, and investment ROI.
Develop Clear Capital Investment Guidelines
We collaborated with several of the client’s functional groups to develop and distribute comprehensive capital investing guidelines that detailed the budgeting process, investment evaluation criteria, required rates of return, a streamlined and documented approval process, and more. Once implemented, high organizational buy-in tied to ownership the functional teams felt led to rapid adherence to the guidelines.
Build Detailed and Informative ROIC Financial Models
Our team completely recreated all financial models involved in the client’s project evaluation process. Rather than one financial model, we developed four unique models, each one focused on a specific type of capital investment. We included a vastly improved set of assumptions and well defined cost of capital that required advanced familiarity with the project components and forecasted an investment’s expected return with significantly improved accuracy.
Implement a Tracking and Improvement Process
Working very closely with the accounting and FP&A teams, we were able to implement a reporting process that allowed the client to track ongoing project expenses versus their approved budget, saving roughly $1.5 million annually in capital outlay. A monthly reporting process was put in place to track specific project payback periods and returns on investment. This visibility allowed us to identify successful strategies that could be repeated shortening payback periods 59% and improving ROI by 35%.
