Why your capital projects portfolio needs a regular health check
As individuals, we all perform regular health checks on our personal investment portfolios to adjust for changing market conditions. Why don’t organisations do the same with their multimillion-dollar capital project portfolios?
Capital projects are an excellent measure of whether a progressive business is growing in the right way and at the right pace. Investors are looking for businesses that spend 100% of their capital budget, because this demonstrates a business that is on track to achieve its growth ambitions.
But most organisations typically only spend 70-80% of their budget each year. This is a problem as it means a chunk of capital is “dead money” that isn’t being returned to shareholders. Rather than being invested in a project that drives growth or reduces costs, it’s not delivering a return. Capital project underspend leaves shareholders wondering why their companies didn’t accurately forecast investment and how company managers can be so consistently poor at meeting timelines and achieving outcomes.
Why does everyone end up in the same position? For three common reasons:
- Hockey stick spending prevails
Capital projects have a very low initial spend – usually only around 1-5% is spent on the development phase. But once in implementation, money starts flowing and the graph ticks upwards.
If every project starts at the same time, your whole portfolio will deliver like that. Most of the spend will be gathered around year end, which means it will be rushed and often inefficient. This is the time of year that companies pay for rush rates or unnecessary airfreighting to try to get projects in under the year-end wire.
Underspend also occurs because it’s just not possible for companies to resource all that work in the last few months of the year.
This is why carryover projects are very helpful. These projects start the year in flight, at a far faster spending velocity than new projects, helping to smooth out cashflow at the portfolio level. But carryover projects alone won’t save the day.
- Big projects have overly ambitious timelines
Research shows that bigger capital projects often inevitably blow out their timelines. Approvals always take longer than estimated, pitches get knocked back by internal processes demanding greater rigour.
Yet organisations still persist with magical timeframes until it becomes obvious the spend simply won’t happen in the currently financial year.
- Smaller projects are slow off the starting blocks
Big projects are like celebrities - everyone wants to be around them and be part of their magic. But smaller, less glamorous projects, which make up 80% of your portfolio and are crucial to achieving your goals, are often slow to get off the ground. As a result, they tend to be initiated in a blind panic towards the end of the year, compounding the hockey stick issue.
The ensuing cashflow issues are a nightmare for portfolio managers and result in underspending, and all the issues that come with that, including unhappy investors and poor capital utilisation.
Performing a regular portfolio health check is vital
One of the big challenges for portfolio managers trying to avoid underspend is that until now, it’s been almost impossible to get a portfolio-level view of cashflow. Individual projects are notoriously poor at forecasting cashflow – and aggregating hundreds of erroneous forecasts is hardly helpful.
Portfolio managers need a fast, easy way to check portfolio health metrics and adjust for risk accordingly. This is where a digital solution comes in. An intelligent platform that can give clear, dashboard visibility of where you are with cashflow, allowing portfolio managers to:
- View cash flow against planning to enable proactive planning, increasing business confidence.
- Dynamically adjust portfolios to smooth cashflow, remain aligned to changing strategic priorities or repurpose funds if big projects fall at a stage gate. CAPEXinsights makes this type of ongoing dynamic resource allocation substantially easier, with real-time dashboards. It means portfolio managers can see how best to stagger projects throughout the year, starting and stopping strategically.
- Determine whether they have enough projects in the right phase levels coming through to form a portfolio funnel that avoids overburdening project organisations, which leads to poor project results.
With CAPEXinsights it is easy to quickly create monthly cashflow forecasts customised to reflect their organisational definition of cashflow (upon commitment, upon approval or when it leaves your bank account).
Time for a portfolio health check
Just as we regularly check and adjust our personal investment portfolios, we need to take a similar approach with capital project portfolios, which are subject to even more complex and unpredictable forces than those affecting the share market.
Now, using an intelligent platform that functions in real-time and aggregates information from every project, we can review and rebalance capital portfolios to reduce underspend and ensure projects achieve their strategic objectives.
For further information about portfolio health checks or to have a personalised demonstration of our product, please don’t hesitate to reach out to us.