Capital expenditures Working capital efficiency frontier

Optimising capital projects for maximum long-term value and short-term liquidity management
In a recent Deloitte global survey, 55% of senior executives reported a lack of confidence in their organisations ability to optimise return on invested capital in their capital planning process. In fact, less than 5% said they were very confident in their process and results and we found that value leakage is a common phenomenon.
Figure 1
Value Creation
Focus Innovation and Investment

Value Management
Analysis / Performance Management

Value Stewardship
Control and efciency

Key Planning Activities

Initiative planning Capital budgeting Strategic planning

cases

Operating budget Workforce planning Driver development and analysis

Planning calendar Review and approval Incentive targets

policies, processes and documentation hierachy and workow

Capital forecasting in a downturn environment where change is rapid. Incorporating dynamic forecasting to measure the impact of key uncertainties and risks on the portfolio of projects is crucial to address this Quantifying the impact of risks and delays at project and portfolio level Multi-year capital funding constraints e.g. balancing short-term projects with investments that have a multi-year time horizon Governance and control over capital expenditures Portfolio prioritisation Organisational efficiency (too much time spent gaming and politicking) and the capabilities and competencies of key resources to effectively execute capital expenditure programmes Determining the optimal decision making level for capital allocation decision (corporate level vs business unit level vs hybrid model). Our approach In order to assist companies to understand whether they are optimising returns on invested capital in their capital planning process, it is important to understand the planning processes that give rise to capital expenditure. We believe that there are three areas during the planning processes where management could focus on improving asset efficiency (see Figure 1). Using a number of leading practice tools, methodologies and processes that enable growth and capital efficiency, we analyse the performance of the company in these three areas, while at the same time identifying fasttrack opportunities that will have an immediate effect on the organisation.

Key Planning Enablers

and analysis tools capital allocation process indicators

management authority and processes

In our experience, companies typically face a number of capital expenditure challenges including: Consistent evaluation of capital projects across diverse project types and sizes Measuring and aligning project interdependencies

Using a portfolio approach Using a leading portfolio approach to achieve capital efficiency and organisational alignment can yield immediate positive cash-flow results for companies. Typically companies view capital expenditures through a cost and benefits filter that focuses largely on ROI and IRR type measures. Whilst these measures are relevant, companies that do so often do not necessarily link these to the strategy of the company. They also do not prioritise capital expenditures in terms of their effect on strategy and shareholder value. We believe that by using a portfolio approach companies could: Increase returns on invested capital by understanding which projects contribute most to shareholder value and lie on the project efficiency frontier Have a holistic portfolio view of the return of the capital of the entire company Improve the strategic and organisational alignment of projects Make informed decisions on where to invest scarce cash resources.

Benefits from improving capital expenditures Deloitte assisted one of the worlds leading gold producers to improve Return on Invested Capital (ROIC). Our client possesses a portfolio of long-life, relatively low-cost assets with a variety of orebody types in key gold-producing regions around the world. One of its strategic objectives is to lift ROIC from historic levels of between 7% and 9% to more than 15% over a 5-year period. Various initiatives were launched to support this objective, including designing processes to ensure more thorough pre-investment analysis and optimising of capital plans supported by innovative financial modelling and analysis. Contact us Rodger George +27 (0)11 806 5328 rogeorge@deloitte.co.za Thomas Jankovich +27 (0)11 209 8839 tjankovich@deloitte.co.za

Submitted Projects

Prioritised Investment Portfolios

ontier Efcient Fr
Goal: Identify and implement portfolios on the efcient frontier. Most companies operate below the curve. For any funding level, choose the optimal portfolio.

Shareholder Value

Value Leakage Inefcient Portfolio C = B + Next Best Investment B = A + Next Best Investment A = Minimal investment

Benet

= Project Cost

= Portfolio

Funding level (budget)

Placing bets: Which portfolio of projects to fund?

Winning: Achieving capital efciency

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