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Capital Planning: Your Most Important Financial Asset

capital planning business definition

When you’re growing your startup, it’s easy to fixate on short-term challenges and goals.

How will you grow this year? What campaigns do you need to execute next quarter?

But in order to scale, you need to start thinking long term.

That’s where capital planning comes into play.

Capital planning is all about making strategic financial decisions for your company’s future and putting processes in place to implement them.

If you want to build the next unicorn, keep reading to learn more about what capital planning is and how to do it.

Table of Contents

What Is Capital Planning?

Capital planning is the process of outlining an action plan for the allocation and distribution of your company’s capital for several years into the future.

Other forms of financial planning (such as budgets, forecasts, and cash flow projections ) tend to be shorter term, looking at the upcoming financial year or zooming in even further to the level of the quarter or month.

However, capital planning is a much more long-term process. It’s typically done for large-scale projects as opposed to day-to-day or monthly expenses.

For example, organizations engage in capital planning processes when they are interested in:

  • Acquiring new companies
  • Undertaking large-scale marketing campaigns such as rebrands
  • Developing a new product and taking it to market

Why Is Capital Planning Important?

Business developments like rebranding or acquiring and merging a new company are, as you’d expect, expensive undertakings.

They can easily cost millions of dollars and take over a year to be completed.

Before you commit to a project of that size, capital planning allows you to answer questions like:

  • Do we have sufficient capital to afford this project?
  • What if the cost of the project increases?
  • What opportunity costs are we missing out on?
  • What other expenses in our business are expected to change during this time?
  • What risks are involved in approving this spending now?
  • How reliable are our revenue streams?

Without a well-developed plan for capital spending, you run the risk of running through your war chest and can find yourself unable to meet financial obligations like debt repayments.

Debt Financing 101: A Guide For Founders

Who Is Responsible For Capital Planning?

Capital planning should be a collaborative process.

While, in most organizations, the CFO (Chief Financial Officer) will head up the project, the capital planning group should also consist of:

  • CEO (Chief Executive Officer)
  • Other finance executives
  • Department heads (such as the Chief Marketing Officer)

Capital Planning – Important Terms

Capital planning is a fairly technical undertaking, and those skilled in the process will need to have a strong understanding of the following common terms.

Capital Planning Group

The capital planning group is the group of people responsible for managing the capital planning process.

They’re responsible for tasks like:

  • Prioritizing and reprioritizing capital
  • Seeking approval from the capital management committee
  • Managing ongoing changes
  • Vetting the proposed list of capital projects

Capital Management Committee

A capital management committee is a group of executives whose role is primarily to approve or decline projects and spending as proposed by the capital planning group.

Capital Request Form

This is a standardized form that includes all of the necessary capital project information so the planning group can accurately assess the pros and cons of the project and decide whether or not to seek approval from the capital management committee.

Capital Project Approval Process

Every company will have its own unique capital project approval process, and it may even use separate processes for different spending amounts.

In any case, the capital project approval process is a series of steps that must be fulfilled in order for a capital spending project to be greenlit.

Capital Project Drivers

The capital project drivers are essentially the main reasons or motivators behind a project’s existence.

Common examples include

  • Obsolescence: Something in our business is obsolete. We need to update it to stay competitive in our industry. (Example: Netflix switching from DVDs to streaming )
  • Growth: We need to achieve significant growth over the next X years. This project will help us do it. (Example: Hubspot acquiring The Hustle to expand )
  • Regulatory changes: There are new regulations we have to follow. We need to change our processes and procedures to adhere to the new standards. (Example: Companies making changes to be GDPR compliant )
  • Cost reduction or avoidance: Making a capital investment today will save us $X down the line. (Example: Semrush acquiring Backlinko to cut back on acquisition costs)
  • Strategic alignment with business goals and objectives: Last year we set a goal to do X. In order to meet that objective, we need to perform this project. (Example: Sprout Social acquiring Simply Measured to align with their focus on data and analytics)

Operating (Routine) Capital vs. New Capital

Distinguishes between capital spending that requires explicit approval through the capital project approval process, and those for which approval can be automated or signed off on in bulk, provided they fall within dictated spending and project parameters.

Minor vs. Major Capital

A delineation between two types of capital spending, generally based on a dollar amount (though the risk may also be assessed).

In general, minor capital requests require a less extensive process and fewer hoops to jump through in order to receive approval.

Monthly Variance Report

A report that is provided to management that analyzes any variance between budgeted and actual project spending.

Monthly Capital Expenditures Report

This is a basic report issued by the finance team that details the capital that has been spent each month.

Its goal is to keep all group and committee members up to date.

Business Unit Leaders

Business unit leaders are the department heads (for example, marketing, sales, etc.) that sit on the capital management committee.

Finance team members that are involved in the capital planning group as well as the capital management committee.

For example, the CFO might sit on the management team, while a financial analyst supports the planning side.

Management Programs

Software platforms that help capital planning teams manage the entire process.

How to Do Capital Planning

Capital planning teams engage in the following activities:

Identifying Needs

The first step in any capital planning process is to understand and define the needs of the company.

This might start broad (e.g., revenue growth), but needs to be narrowed down to specific, measurable metrics (e.g., increase revenue by 20% in 12 months).

Determining Financial Impacts

This involves answering questions like:

  • What happens if we don’t do anything?
  • What costs are involved in this completing project?
  • What other ongoing lifecycle costs will be accrued?

Financial and Scenario Modeling

The capital planning team must plan financials for the ideal scenario, but also prepare models for alternative situations that arise.

For instance, what happens if the cost of the project is 15% higher than estimated.

Can you afford the higher costs? What adjustments will you need to make?

Prioritization of Capital Requests

Capital planning teams rarely work on a single project.

They’ll receive multiple requests from different departments at any one time, so it’s their job to determine which projects are most critical to the business as it stands today, and prioritize spending accordingly.

Developing a Financial Plan

This includes forecasting financial aspects such as:

  • Expected revenue
  • Cash flow projections
  • Potential implications of legal changes
  • Source and uses of debt services
  • Funding sources

Providing Visibility to Key Stakeholders

Throughout the capital planning process, it’s crucial that everyone involved (the members of the capital planning group and the capital management committee) are kept up to date with regular reports on spending, capital allocation, and project wins.

To be successful at capital planning, you’ll not only need to develop the skills we’ve discussed above; you’ll also need a capable financial planning and modeling platform by your side to help you assess various situations and provide accurate reports to your leadership team.

Don’t have one? Check out Finmark , we’re just what you’re looking for.

Josh Krissansen

This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.

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What Is a Capital Project?

Understanding capital projects, examples of capital projects, capital project funding, what are capital projects in government, what is a noncapital project, what makes a capital project successful.

  • Corporate Finance
  • Corporate Finance Basics

Capital Project: Definition, Examples, and How Funding Works

capital planning business definition

Yurle Villegas / Investopedia

A capital project is a long-term, capital-intensive investment to build upon, add to, or improve a capital asset . Capital projects are defined by their large scale and large cost relative to other investments that involve less planning and resources.

Key Takeaways

  • A capital project is an often-pricey, long-term project to expand, maintain, or improve upon a significant piece of property.
  • A capital project is distinct from other company projects as it is large in scale, high-cost, and requires considerable planning relative to other investments.
  • Capital projects often refer to infrastructure, like roads or railways, or, in the case of a corporation, the development of a manufacturing plant or office.

A capital project is a large-scale project with a high cost that is capitalized or depreciated .

Regular capital investments, such as new facilities, structures, or systems, may be necessary to accelerate growth within a company or government—for example, if a company wants to build a new warehouse or purchase new manufacturing equipment to increase efficiency on the factory line.

Capital projects typically consist of the public sector building or maintaining infrastructure, such as roads, railways, and dams, and companies upgrading, expanding, or replacing their facilities and equipment.

Capital projects must be managed appropriately, for they require a significant commitment of company resources and time. The project assumes a calculated risk with the expectation that the capital asset pays off. Management of risk is a key driver of successful project development and delivery of a capital project.

The most common examples of capital projects are infrastructure projects such as railways, roads, and dams. In addition, these projects include  assets such as subways, pipelines, refineries, power plants, land, and buildings.

Capital projects are also common in corporations . Corporations allocate large amounts of resources ( financial and human capital ) to build or maintain capital assets, such as equipment or a new manufacturing project. In both cases, capital projects are typically planned and discussed at length to decide the most efficient and resourceful plan of execution.

Capital projects are big investments and, therefore, face a lot of scrutiny, especially when paid for with public funds or the money of a publicly traded company . The goal is for these investments to pay off, but sometimes they are poorly planned and executed and end up losing significant capital . 

These projects are big, take time to complete, and can cost a lot of money, meaning it is often necessary to obtain equity or debt financing to make them happen. To receive funding, capital projects are obligated to prove how the investment provides an improvement (additional capacity), new useful feature, or benefit (reduced costs).

Additional funding sources for these projects include bonds , grants , bank loans , existing cash reserves , company operation budgets , and private funding. These projects may require debt financing to secure funding. Debt financing may also be required for infrastructure, such as bridges. However, the bridge cannot be seized if the builder defaults on the loan. Debt financing ensures that the financier can recover funds if the builder defaults on the loan.

Economic conditions and regulatory changes can affect the start or completion of capital projects, as in the case of  Brexit , which caused the cancellation or delays of some projects in Britain.

In the United States, Congress is responsible for funding public capital projects, such as roads, power lines, bridges, and dams.

Government capital projects are large-scale, costly projects to maintain or improve public assets, such as parks, roads, and schools.

Most public offices set thresholds for what qualifies as a capital project. For example, in the Commonwealth of Virginia, a capital project is defined as a project that creates at least 5,000 gross square feet of building space or exceeds $3 million in total project cost. Projects that fall under each jurisdiction’s thresholds, which can also include life expectancy, may instead be called noncapital projects.

Careful planning and realistic estimates do. Affordable funding needs to be secured, costs need to be managed well, and the project must have a very good chance of becoming profitable. One or two setbacks could turn a capital project into a financial disaster.

The Bottom Line

Capital assets are key revenue generators and the backbone of many companies. Those wishing to expand and become more profitable will need to invest in capital projects and do so in the most cost-effective way possible. Over time, it is smart, well-executed investments that separate the good stocks from the weak ones.

Marwan Mohamed, Erika Anneli Pärn, and David J. Edwards, via ResearchGate. “ Brexit: Measuring the Impact Upon Skilled Labour in the UK Construction Industry .” International Journal of Building Pathology and Adaptation , Vol. 35, No. 3, Pages 264–279.

Construction Products Association. “ Brexit—Impact on Construction Products .”

Industrial Engineering and Operations Management Society. “ BREXIT: Assessing the Impact on the UK Construction Industry & Mitigating Identified Risks .”

U.S. Capitol Visitor Center, via Internet Archive. “ What Congress Does .”

Virginia Tech, Division of Campus Planning, Infrastructure, and Facilities. “ Understanding Capital vs. Non-Capital Projects .”

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