Keys to the Coffer
July 01, 2009
by Kimberlie Clyma
One of the problems associated with a tight money market is the impact it has on capital investments. Tight money markets require we do more with less, and capital investments are certainly some of the first targets for spending reductions. To address this issue, focus on what is best for the business — investments that yield the greatest cost reduction, improve operating efficiencies and labor utilization, reduce downtime and minimize the expenditure required. Here are five steps to ensure project approval.
1. CLEARLY DEFINE THE PROJECT. Build credibility by thoroughly researching the project. Question why and if it is necessary. What is driving the project and what are options to address these drivers without making the investment? Many times, challenging the basis for the investment can eliminate the need for the investment or reduce the scope of work.
Example: A project was submitted for more than $100,000 to install sprinklers in warehouse pallet racks used to store raw materials. The project was based on a recently performed insurance company audit. The necessity of the project was challenged, and it was determined that a modified storage plan for the racks would eliminate the need for sprinklers.
Next, establish clear objectives that directly address the drivers for the project and are "SMART" — specific, measurable, attainable, relevant and time-bound.
2. USE ACCURATE INDICES. Determine the operating indices that are being reported today. Don’t just accept them at face value — confirm them. Research downtime, process and packaging waste, labor use, maintenance and sanitation costs and operating efficiency. Create a baseline for these indices to be used as a basis for comparison after the new equipment and systems are installed.
Do your analysis. What will be different after the investment is made? What will be the associated savings stream? This is no place for either conservative or optimistic positioning or educated guesses. The present situation must be fact based, and the forecasted savings stream needs a solid basis. Provide an assessment of the risk (a sensitivity analysis) associated with changes in the forecasted capital spending and/or the savings streams. Evaluating changes in both the spending and savings by ± 15 to 25% provides a good basis for the analysis.
3. MINIMIZE CAPITAL, ADD VALUE. Focus on minimizing the capital expenditure necessary to achieve the established objectives. Look for creative solutions. Involve the vendor community. Seek solutions that add value to the project.
Example: A bakery needed to replace a mixer that had worn out from more than 20 years of operation. The project was thought to be a stay-in-business investment with no identifiable return on investment (ROI). As a result of discussions with the vendor community, the baker purchased a mixer that improved absorption by more than 1.5%. The project had an ROI of less than two years.
Provide sufficient detail to your capital spending forecast to individually capture the major expenditures and identify minor expenditures by category. Don’t forget frequently overlooked costs such as administrative, taxes, freight, permitting and spare parts. Provide a summary and analysis of forecasted savings streams and the ROI.
4. PROVIDE A NARRATIVE. Regardless of the format, the project proposal should walk the reader through every step. Avoid technical jargon such as "state of the art," "cutting-edge technology," etc. These phrases are overused descriptions of commonplace technology. Take the reader through the basis for the project, the options considered, the analysis performed and the objectives reached. Finally, explain the capital expenditure, spending forecast, the savings stream and the expected ROI.
5. SPEND WISELY! This approved money will go quickly.
This article can also be found in the digital edition of Baking & Snack, July 1, 2009, starting on Page 12. Click here to search that archive.