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Unit 10: Cash Management

bring revenue assumptions of their own. The trick, then, comes in ensuring that each discrete Notes
section of the capital expenditure plan is a tightly integrated piece of the whole, so that changes
in one area are simultaneously reflected in all other areas. In other words, when one planning
assumption changes, all the rest of the assumptions must take into account the consequences of
that change. This scenario is further complicated when the capital expenditure plan relies on cost
inputs from a number of organizations. In such cases, the plan must not only meld different
functional viewpoints, but also deal with the obstacles of organizations operating in different
geographies and time zones. According to Ed Kiernan, director of business intelligence at Deloitte
Consulting, all these factors make it extremely challenging to plan large-scale capital expenditures
using a standard template. Says Kiernan, “Typically, these projects are too complex for the
finance department to simply issue standard Excel templates to the business. Instead, the business
must do its own local modeling, planning the business as it sees it.” But the disconnection
between business and finance is very real. Kiernan says, “The chances are that in a very large
project a number of finance professionals and bankers will pore over the economic feasibility of
the plan, reviewing matters such as interest rates, taxation and accounting policies. But who’s
looking at the assumptions made by the business? It’s these technical and business assumptions
that can really scupper the capital expenditure plan.”

Linking Long-Term Projections to Financial Plans

Managing the financial consequences of capital expenditure planning is especially challenging—
not surprising since estimating the state of a balance sheet, a dozen years out or predicting
project cash flows over a decade are exercises with an inherent amount of uncertainty. Planned
and unplanned changes go with the territory. Indeed, the lengthy timescales involved introduce
considerable fluidity into planning assumptions—and finance professionals often feel cut adrift
from the underlying technical assumptions made by experts outside their functional areas.
As one senior finance professional in the defense sector describes it, “The financial aspects of the
plan—for example, cost of capital, the depreciation policy, funding timing, exchange rates, and
so on—may have a measurable impact on the project’s outcome, but these factors pale into
insignificance compared to some of the assumptions made around technical and operational
feasibility.” The discovery of unhelpful geology on a construction project or the impact of
persistent bad weather on the delivery of a North Sea oil rig can have far more damaging
consequences on financial outcomes than aspects of the plan specifically related to finance.

And the issues don’t go away when a project has been completed: They simply transition to ones
associated with long-term service contracts. For example, how do you forecast the timing of
your maintenance cash flows (both expenditure and revenue) when your service is unique and
perhaps not that well defined? What’s more, technology changes so quickly that assumptions
about service delivery methods (such as aircraft maintenance and network infrastructure) can
easily become obsolete before they even come into effect.

Record Keeping and Compliance

Because complex assets tend to be multifaceted, they often require a variety of accounting
treatments. Providing the level of detail required to accommodate these various accounting
treatments is one of the greatest challenges of capital expenditure planning.
When developing a capital expenditure plan for a complex project, organizations must correctly
categorize every major component so that they’re treated appropriately in the financial forecasts
contained in the capital expenditure plan. For example, each component of an asset (property,
plant, or equipment) whose cost is significant in relation to the total cost of the asset must be
depreciated separately. For examples of this, think of an aircraft and its engines, or a blast

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