The zero-emission transportation world is entirely about spending money. A fundamental aspect of that spending is the pursuit of capital budget funding. Whether you are a manufacturer, fleet or shipper, you regularly have to chase funding to implement new ideas. Whether a private, public or government entity, someone has budget authority, and everyone wants a piece of those funds. To that end, I offer up some first-hand thoughts on capital budgeting both chasing funding and observing others over more than 40 years in the aerospace and transportation industries.
Capital budgeting can be an annual exercise in digging holes and filling them up again. Convincing the people who have control of the money to spend it on your idea would be easy if you were not competing against all the other people vying for the same limited pot of money. Many projects are outlined, many are considered, yet fewer are actually funded.
If you’ve had any finance classes in your career, you might be deceived into thinking that budgeting has to be logical and follow rules. Especially if you are an accountant, the black and red ink world you live in is supposed to be nothing but unassailable rules to ensure financial integrity. The real world of budgeting, however, includes emotion, back-room deals, opportunism, guile, innovation and advertising. Put more simply, politics.
Ideas vie for funding at companies not unlike politicians vie for votes. Here are a few lessons learned for successfully winning capital budget.
Capital budgeting success starts with having a project with a succinct, catchy title — something with allure; something with buzz surrounding it on social media. First impressions matter, and nothing is more “first” than the title of a project. Think of the attributes of a great news article headline — three to five words that will capture the attention of managers looking through long lists of project titles. Ultimately, you want decision makers to want your project so they will fund it. Often, busy managers initially filter projects out from simple lists of titles, amounts and ROIs.
The second requirement is to put a story together that gets your project to have a return on investment well above the target minimum hurdle rate for your company, but not too high as to appear unrealistic. Even if you have a fantastic ROI, you might need to tone it down a bit to keep it in the pool of viable projects. Or you may have to spruce up the ROI so it’s not too low to be of interest, even if it’s above the hurdle rate. There is a Goldilocks and the Three Bears “just right” number your managers feel comfortable believing, and it’s probably different at each company.
Thirdly, the project must have a viable timeline that fits into management’s attention span. A five-year project in a company that struggles to successfully implement one-year projects may be discarded instantly.
Fourth, projects that can commit the funding quickly will have a higher priority than ones where the bulk of the money is spent at the end of the project. Often there are hidden company requirements that money hits the balance sheet as expenses in specific periods or they risk being reallocated. Possession is not nine-tenths of the law with respect to capital budgets, it is purchase orders that lock in the money.
Fifth, lobbying key supporters is critical in the cut-throat competition for project funding. You may not get a seat at the decision-making table, so you want to have advocates there who are willing to speak on behalf of your project. Winning these advocates over often requires explaining how your project will directly benefit them. What seems obvious to you may not be so obvious to others, so be explicit with them. Remember that the project is not about making you look good, but rather about making the company more profitable and making your advocates look good in the process.
Sixth, make the case for the project based on cost reduction first. Nothing sells a project better than cost reduction. Market share growth is a good second goal, but managers know that growth has a lot of uncontrolled external variables, where cost reduction usually is entirely within the control of the company. All the other attributes are icing on the cake in the event your project's ROI is tied with another one and someone needs to flip a management coin.
Seventh, and lastly, be ready to implement your project at the drop of a hat. Often capital budgeting approved early in the year has not been spent as predicted and management hates year-end accounting showing they did not spend all the funds they were allocated. Projects not approved in March may very well be resurrected in November as long as you can ink the purchase orders by year end.
Winning funding is an acquired skill learned through doing. I often would mentor new hires and students that we are all in sales, irrespective of your vocation. It is perhaps a major flaw that universities and technical schools largely fail to emphasize that the real world is a daily competition for funding, where logic and reason don’t always apply.
Care must be taken to be on firm ground with project goals. Successful projects have many parents, but failures are entirely on the originators. Fake it until you make it approaches have had mixed successes in the news the last few years. The bill always comes due; it just may take some time. It’s best to make sure you can live up to your project’s vision.