It is often beneficial to think of investments in terms of opportunity costs. As funding is approved for a new capital project from cash reserves or cash flow, this implies that the capital investment is the highest and best use of the company’s capital after considering all possible alternatives. When the actual capital expenses vary significantly above or below the capital expense forecast, there is a price to pay in the lost opportunity for each unspent or overspent dollar. Often enough, there is room for improvement in the way capital expense is forecast, tracked, and controlled.

1. Capital Projects Efficiency
Efficient Use of Working
Capital

2. 2
Efficient Use of
Working Capital
It is often beneficial to think of investments in terms of opportunity
costs. As funding is approved for a new capital project from cash
reserves or cash flow, this implies that the capital investment is the
highest and best use of the company’s capital after considering all
possible alternatives.
When the actual capital expenses vary significantly above or below the
capital expense forecast, there is a price to pay in the lost opportunity
for each unspent or overspent dollar.
Often enough, there is room for improvement in the way capital
expense is forecast, tracked, and controlled.

3. Efficient Use of
Working Capital
Latent Budget
The aggregated performance of capital spending can characterize how
effectively an organization can apply its capital funds.
When analyzing budgets versus actual spends:
• Patterns of rushed or erratic capital spending that exceeds plans,
put strains on the organizations funding. This results in delayed
project starts or increased costs of capital to meet commitments.
• Also, resource constraints of the capital program limit the volume
of work to lower levels than planned the result is an underspend
toward capital commitments.
These kinds of patterns create inefficiencies in how capital is managed.

4. 4
Efficient Use of
Working Capital
Latent Commitments
Purchase orders and other types of contractual commitments
represent a financial obligation for the company. Efficient financial
processing ensures that only appropriate commitments are
maintained in an open state.
Latent commitment may represent unused/unneeded funds or the
POs that were not closed as part of project close-out activities.
Whatever the reason, latent commitments can lead to inaccurate
financial reporting and uncertainty over funding requirements.
It is important to know what % of its commitments are ‘latent’ at any
point in time and drive improvements to contract management
processes.

5. 5
Efficient Use of Working Capital

6. About the author
Michael Goggin is a Director at Enstoa. His passion for analysis is grounded
in data and aims to uncover actionable intelligence in Capital Programs.
Connect with Michael here.
Read Key Metrics & Predictors for more insights.
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