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Capital Budgeting Process: Why Your Data Is Failing You

Budgetary decision-makers are responsible for the distribution of hard-earned investments: from donor funds, investor dollars, and tax-payer money to the time and effort of their organization’s workforce. The toughest challenge these financial decision-makers face is accurately allocating precious capital resources while balancing a range of constraints and pressures during the facility capital budgeting process. One wrong decision can mean millions of dollars poorly deployed or completely lost.

Whether executives realize it or not, at the heart of this allocation challenge lies an incredible lack of accurate data needed to properly assess facility needs. This inaccurate data problem is running rampant, feeding misinformation from facility directors to asset managers and leading C-suite executives to make less-than-ideal budgetary decisions.

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Your Capital Budgeting Process Relies on Inaccurate Data

Traditional facility capital budgeting processes rely on pulling together several sources of information. Facility Directors generally kick off this process by assessing their facilities' current state and then asking for the money they think they need to keep the buildings warm and the toilets flushing.

Determining where money should be allocated requires an accurate capture of current facility asset conditions at both a granular and global level.

Current Capital Budgeting Process

  1. Start with bad data: Gathering the needed data to start the capital budgeting process is an absurdly complicated task using legacy systems. Facility Directors must sort through literal and figurative piles of outdated facility condition assessment (FCA) reports, work orders, repair statuses, warranties, and other siloed information. The data needed is often unavailable or inaccessible, leaving directors to rely on technician input and educated guesses.
  2. Add in some lousy statistics: Once gathered, these inaccurate information points are combined with generic depreciation and maintenance statistics to produce estimates for maintenance and replacement schedules. The problem with these statistics is that they aren’t specific to conditions (such as heat, humidity, vibration, etc.) and fail to consider your facilities' maintenance histories. Therefore, they come with low confidence levels and wide ranges.
  3. Analyze with simplistic math: All that iffy data is then baked with generic statistics in a final capital budgeting request in Excel. Sometimes the margin of error/fudge factor is baked into the base numbers, and sometimes it’s explicitly called out in the spreadsheet. Sometimes both. Either way, capital planners and budget holders assume that the Facility Directors have asked for more than they need and cut the request accordingly. Even worse, without accurate data to back up a budget request, it’s seen as nothing more than a line item. There’s no way to communicate the urgency of specific requests accurately.

The final product is generally recognized as a series of estimates and guesswork. In a good year, the mistakes largely cancel each other out. Everyone avoids thinking of the years when they weren’t so lucky.

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The Impact of this Bad Data on Your Capital Budgeting Process

Deploying weak data creates additional challenges:

  • Problematic deferments: Overestimating the stamina of equipment leads to incorrect maintenance deferments. You end up blindsided by unexpected breakdowns requiring emergency repairs or total replacement, which lead to unexpected major expenses. As a result, you may have to deal with safety or operational ramifications and the time-consuming toll of customer dissatisfaction.
  • Exceeding useful life: After an asset has reached its useful lifespan, it’s more expensive to maintain it than replace it. But how do you know when you’ve reached that point? Without precise data, this notion that fully functioning equipment is slowly bleeding capital reserves dry becomes particularly hard to communicate.
  • Poorly deployed capital: Underestimating how long equipment will hold up leads to the direct mismanagement of capital reserve. When funds are budgeted to resolve problems that don’t transpire, investment gains cannot be realized.
  • Incorrect prioritization: Without a clear picture of the overall status of every component of a capital plan, it’s impossible to correctly prioritize for the coming year. Priorities end up being shifted on an ad hoc basis.
  • Starting from scratch: Without a current data feed of facility conditions, directors are forced to reassess capital allocation with every budget cycle. From replacements and major repairs to new construction, starting budget planning from square one on big projects consumes vast swaths of time without adding significant value.
Without accurate data to support your capital budgeting process from the very beginning, there’s simply no way stakeholders can make these critical decisions.

It’s Time to Overhaul Your Capital Budgeting Process

The issues that bad data cause in your capital budgeting process can be overcome—if you have the right technology.

At AkitaBox, our Capital Management solution combines automated data gathering, global pools of information, and artificial intelligence (AI) to support your capital budgeting now and in the future. Using this type of platform makes it possible to design budgets correctly the first time, including appropriate allocations for replacement and major repairs, so projects can be carried out on time without funds running dry.

 

capital budgeting process - solution

 

Our platform collects and analyzes your specific data from your assets and facilities to model future scenarios and provide real-time insights to be leveraged by budget decision-makers. The capital management solution is a foundational solution built to support precise ongoing capital planning now and fully automated predictive maintenance in the future.

Ready to overhaul your capital budgeting process with AkitaBox?

Download our eBook.

Download Now

 

Or, talk to an expert if you’re interested in seeing AkitaBox in action

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