Capital Plan Procedure

The Capital Plan Procedure enables the company to forecast capital needs and availability, use best alternatives considering the cost of capital and overall capital structure, create, implement, and monitor results of the Capital Plan, and continually improve the Capital Planning Process.

The Capital Plan Procedure applies to the Finance Department, Top Management, and the Board of Directors. (14 pages, 2123 words)

Capital Plan Responsibilities:

The CFO (Chief Financial Officer) is responsible for annually creating a capital plan that aligns with overall business plans and strategies, and for reviewing the capital plan with Top Management and the Board of Directors.

Top Management and the Board of Directors are responsible for reviewing and approving the Capital Plan and any changes to the Plan.

Capital Plan Definitions:

Capital – Financial resources available for a business to use; also the assets a business uses to generate income (i.e. cash, property/facilities, equipment).

Capital Asset – Asset that appears on a balance sheet (i.e. manufacturing equipment, inventory).

Leverage – Investing or using financial resources to produce income or positive cash flow. For example, a business borrows $50,000 to buy a piece of equipment (which it will pay back at $11,000 per year including interest over 5 years) that will produce goods it can sell for $20,000 per year for 10 years.

Capital Structure – The means by which a firm is financed. The makeup of the liabilities and stockholders’ equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.

Weighted Average Cost of Capital (WACC) – Overall return in annual percentage that a corporation MUST earn on its existing assets and business operations in order to increase or maintain its current value.

Capital Plan Procedure Activities

• Capital Planning Background
• Preparing the Business Capital Plan
• Monitoring the Capital Plan
• Improving the Capital Plan

Capital Plan Procedure Forms

• Capital Analysis Form
• Capital Plan Worksheet Form
• Capital Planning Form

Increasing Shareholder Value

An important goal of any business is to increase its value for stakeholders, and particularly for the owners/shareholders. The business value stems from owned assets, but even more importantly from the business’ ability to reliably generate income (revenue). Businesses use capital (financial resources) as leverage to increase business value through increasing capital assets and revenues.

Capital Plan Sources of Capital

The typical sources of capital for a business include:

• Selling shares or interests;
• Debt and credit; and
• Projected profits, retained earnings, and investments.

Top Management (with Board of Directors approval) should regularly produce business plans and strategies that describe short and long term plans for applying business resources, including financial resources, for improvement and growth.

Capital Plan Uses of Capital

Typical plans that may require Uses of capital (financial resources) include:

• New facilities or existing facility renovation/expansion;
• New product research and development;
• Expansion into new markets;
• Acquisitions and mergers;
• Improving or replacing capital equipment or processes; and
• Annual capital budget for improving or replacing equipment, processes, facilities, and other capital assets.

Aligning Capital Plans with Business Plans

The CFO creates a capital plan that aligns with the business plan to ensure adequate financial resources are available, and to identify best sources of capital considering the cost of capital (and/or other relevant analysis) and ideal capital structure.

Business plans and strategies should be reviewed from a financial perspective to assist Top Management and the Board of Directors in determining:

• Financial feasibility and risk;
• Impact on cash flows and working capital (negative or positive); and
• Affect on financial structure and financial statement analysis.

The completed capital plan should be reviewed by the Top Management and the Board of Directors, and then monitored with actions taken when the plan is not effectively providing financial resources at an efficient cost of capital.