Capital budgeting is critical to an organization’s success. However, many organizations still approach it in an ad hoc fashion. They tend to view capital budgeting as an isolated financial process rather than a strategic investment decision, which may lead to failure to consider the long-term operational impacts.
At 4tell™ Solutions, we work with commercial real estate organizations of all sizes. We help inform capital investment strategy through our proprietary line of real estate performance optimization software. It’s never easy to forecast capital needs across different departments and years. Luckily, there are new tools and best practices for those who manage, own or invest in real estate. Here are some of the key trends for 2017.
Improvements to Data and Business Intelligence
In a data-driven economy, good information is critical. That is especially true when it comes to capital budgeting decisions.
In recent years, the expectations for data formats have changed. Organizations used to work with predetermined data formats. Today, they are increasingly dictating how they want their data structured.
Most of this advancement is due to improvements in data and business intelligence. Not familiar with the term? Business intelligence involves using software to analyze raw data. For real estate, the data is typically about the property, market and organization.
The market for front-end analytics and visualization is well established. This year, we are seeing more of a focus on data gathering and preparation. Organizations are looking for ways to boost efficiency in data upload and capture. This focus improves all data-oriented processes, including capital budgeting.
Evidence-Based Capital Budgeting Processes
The capital budgeting process for most organizations is rations-based. Decision makers usually divide finite capital amongst various teams. They decide on the amounts based on historic and superficial need. Most departments get a similar amount year after year, regardless of changes to business needs. If they do not spend their whole annual budget, they usually receive less the next year. Over-spenders are generally penalized as well.
Progressive organizations are moving away from financial-based capital budgeting. Instead, they are using a project and data-based allocation approach. For example, imagine a team that had a capital budget of $1 million last year. Instead of requesting the same amount this year based on their historic needs, they focus on their multi-year capital projects and request funds accordingly. It may be $5 million this year and $500,000 the next.
This may seem counterintuitive. However, it results in a more effective use of capital across an entire organization. Groups are more likely to spend in ways that will be most beneficial vs. trying to spend money unnecessarily in order to maintain their annual distribution.
Aligning Capital Budgets with Organizational Goals
One of the key trends in capital budgeting is easily overlooked. Organizations must be aligning their capital investment plans with their organizational goals. This may seem like an obvious move; however, they are typically looked at as two separate processes.
Environmental, social and governance (ESG) policies continue to gain importance in commercial real estate. That is the case in both the public and private sectors. Organizations need to ensure their capital is working to meet corporate ESG goals. This includes targets for things like energy conservation, sustainability initiatives, and tenant wellness.
Capital Budgeting, Business Intelligence and 4tell™ Solutions
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