This newsletter is for leaders who want to be confident that they're making the right investments.
In conjunction with the development of our operations management software platform, XBE is committed to refining its strategic financial management framework for growth-focused leaders in the horizontal construction industry. While many aspects of our approach are employed by large, sophisticated corporations, they are less common in privately owned regional businesses, which make up most of our clientele. Many companies tend to invest in the same type of assets over time, but profitable expansion opportunities of the same type eventually dry up. The best avenues for investment often become vertical integration, or horizontal growth and acquisition.
We have developed and are promoting this financial management strategy for three main reasons:
- XBE is driven by the mission to help customers maximize Return on Invested Capital (ROIC). This requires excellent operating capabilities and consistently wise investment decisions, including the decision to partner with XBE.
- Many of our most popular software features began as management theories. Publishing those ideas can provide the initial step towards crafting new software features.
- Our clientele frequently face dilemmas on where to reinvest their growing profits effectively.
We have established the following principles associated with achieving superior Capital Expenditure (CapEx) performance. We believe that having a clear vision, albeit ambitious, is vital for leaders, particularly during periods of change.
Principles of "CapExcellence"
Maximize Investment Options.
- All potential investments should be evaluated on an enterprise-wide basis.
- Consider divesting assets that are not in use or growing in value.
- Despite budgetary expectations, business units should aim to create as many positive Net Present Value (NPV) investment options as possible, allowing capital to flow to them naturally.
- Merger and Acquisition (M&A) opportunities should be evaluated against all other CapEx possibilities and not seen as fundamentally separate.
- Forward-looking market dynamics and company strategy should drive future investment analyses, rather than relying exclusively on past data.
- Use NPV as a standard measure for all investments, balancing time and risk.
- Investment assessments should account for outcome uncertainty, and that quantified risk should impact the discount rate.
- The discount rate should reflect the actual cost of capital and solvency risk.
Integrate with Operations.
- Pairing CapEx processes with comprehensive sourcing and procurement procedures improves implementation.
- There is no inherent distinction between maintenance and growth CapEx. Implementing zero-based CapEx, similar to zero-based budgeting, can prevent inertia.
- Any decisions leading to long-term operational spending commitments should be integrated into the CapEx process when possible.
Educate and Manage.
- A yearly assessment of past CapEx decisions should be made before making new ones, establishing a feedback cycle for continuous improvement.
- Leaders should assume full responsibility for the quality of CapEx decisions, irrespective of process maturity, ensuring that tools align with these CapEx excellence principles.
- Individuals involved in the CapEx process should receive formal training on these principles.
- CapEx decisions should be plainly communicated to all stakeholders, as they embody key aspects of the company's strategy.
- The balance sheet should be rigorously stress-tested against systematic risks to ensure the CapEx plan isn't exposing the business to unmitigated solvency risk.
- Return on Invested Capital (ROIC) should be integrated as a key metric during financial performance assessments.
Your feedback helps refine our thinking and the prioritization of future research and development.
How many of these principles do you currently follow? Which are most valuable? Which do you disagree with? What's most difficult? How do you plan to improve your process? Do you have the tools you need?
Finally, we know that this newsletter covered a lot of ground and lacked specific examples and explanations. We first wanted to lay out a comprehensive vision for capital expenditure management, and we'll follow this up with more focused content in the areas of greatest interest.