Allocation of capital can be complex. Shifting priorities, external pressures, trade-offs, and stakeholder interest show no signs of abating. A changing world means more complexity, not less. Our Crunch time report takes an in-depth look at how CFOs can understand, simplify, and improve their organization’s capital allocation process.
Why are we talking about capital allocation now?
Finance leaders constantly weigh the return of their business’s time, resources, and human capital investments in their efforts to maximize the organization’s health and shareholder value. But what about analyzing the investments themselves? Capital allocation challenges can be a lot to untangle. Here’s why we’re talking about it now:
A changing world: COVID-19; environmental, social, and governance risk; and activist shareholders are forcing many executives to reckon with long-term impacts on strategy.
Policy matters: As administrations pursue and implement new tax policies, it can have an enormous impact on how—and how fast—companies can use tax equity for capital outlays.
More than profit and loss: Focusing on capital allocation means ensuring that the organization can keep creating value as it changes within its charter and shareholders’ expectations.
Competitive advantage: An effective strategy can narrow the gap between what a portfolio could deliver and what it actually does deliver.
How to build the big picture (piece by piece)
What you’ll need for your capital allocation journey:
How one organization found its way
A US government agency was told to cut its energy use significantly. That meant changing its maintenance spending, a key pillar of its capital allocation strategy. Usually, decisions about the allocation of capital are examined with one criterion: how much is this going to cost? But what if someone wanted a new fleet of hybrid trucks or electric cars, which tend to cost more than gas-powered vehicles, but could provide a cost benefit down the road?
The agency knew it needed a different way to look at these decisions, which had broader implications than need and cost. First, its finance team decided on a metric that could be applied to each decision (in this case, translating pounds of CO2 per dollar), which gave each proposal a true cost. The agency trained its stakeholders to understand this new process and introduced metrics for project criticality, internal alignment, and future value so trade-offs could be measured.
The agency was able to capture tens of millions of dollars in cost savings the first year, and carbon savings per proposed project increased from a median $4 per pound of CO2 to $97 per pound.
It's crunch time
By tackling your capital allocation strategy, measuring what matters, and building a plan and team for the future, you can create a new competitive advantage for your organization—one that keeps an eye on what the future might hold while building on the success that’s right in front of you.
Deloitte can help
Our Finance Labs explore the “art of the possible” and define your Finance Transformation strategy, bringing to life potential use cases, road map priorities, and future-state benefits. Contact us to learn more.