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Crunch time series for CFOs: Untangling capital allocation

How to simplify the challenge

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:

Know your stakeholders

By understanding who your stakeholders are and what they want (and why), CFOs can mitigate a major challenge in capital allocation: bias. Talking to your people openly about what they want, and the behaviors they’re using to get it, can boost transparency; this can help you get your stakeholders on board for the journey to better decision-making.

Recognize and rectify bias

Historical bias, narrow focus, expert bias, and more can all sway a major capital planning decision for better or worse, and they exist everywhere. By correcting for these biases and others, you can lend impartiality to decisions that can otherwise feel subjective.

Measure twice. Do it again 

CFOs can help their stakeholders better understand decisions and diminish their bias by applying measurement. But measurement isn’t always in numbers. Using multiple criteria to make a capital planning decision (or simply looking at it from different angles) can shine a light on overall strategy, risk, and trade-offs and how these fit into an organization’s portfolio.

Create and follow a checklist

Goals, data, tools, people, and a plan: You’ll need all these for a rightsized and efficient capital allocation strategy, no matter the size of the project you want to tackle. Start small and implement these changes slowly. The only timeline you have is your own.

And one more thing: Ask the question that no one else wants to think about

How could we be wrong? No capital planning decision should be made without asking that question. It’s up to you as a finance leader to look at each financial decision holistically, and that means examining it from the angle of failure.

How one organization found its way

The challenge:

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 solution:

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 result:

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. 

Download the guide

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.

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