W14_TP_Capital Budgeting Process

Background

Capital budgeting conducting every year in purpose to have a project presentation in order to asking money to execute the project. Capital Budgeting is the process by which the firm decides which long-term investments to make.

Feasible Alternative

They are a category on capital investment, are:

–         Growth Investment

–         Sustaining Investment

Selection Criteria

For this blog, capital budgeting process will focus on Sustaining Investment since this capital category is the most category that proposed by sponsor.

For sustaining investment at capital budgeting, will use Discounted Cash Flow (DCF) technique.

Assessment

Discounted Cash Flow is what someone is willing to pay today in order to receive the anticipated cash flow in future years. DCF means converting future earnings today’s money.

DCF can be an important factor when evaluating or comparing investments, proposed actions, or purchases. When discounted cash flow events in a cash flow stream are added together, the result is called the Net Present Value (NPV).

However, NPV method sometime is not consistently use during analysis of business case when capital budgeting process conducting. The NPV calculation required especially for sustaining project with Betterment Type, which is delivering the financial evaluation to company if we want to spend the money for medium and/or long term investment.

Figure 1 Interrelationship Diagraph

 Analysis

From data above, we have 2 main problems why NPV can’t consistently used as main supporting document when business case presented for capital budgeting process, are:

1. NPV number not represent the business case proposed

Some of sponsor attached their financial analysis, but the number of calculation is not representing the main purpose of investment required.  The impact is, capital budgeting proposed can’t release.

2. NPV number can’t calculated well

Most of sponsor attached their financial evaluation, but the number of NPV is wrong due to lack of data and the impact is, capital budgeting committee hard to find the solid justification from their financial evaluation.

Here some solution to be following up to ensure NPV calculation consistently used and deliver the correct number.

Figure 2 Tree diagram

Conclusion

Understanding of how important NPV calculated well in order to support the justification of business case is the important thing that sponsor has to aware and willing to change their paradigm to ensure NPV delivering the correct number and can used by Capital Committee prior releasing the budget to execute the project proposed.

Continues Improvement

Conducting training to sponsor and/or engineer is the key to ensure all area understand on how NPV calculated and used. Socialization and Project Management Road Show is the sustaining program to support this.

References:

  1. Brassard, M and Ritter, D (2010), The Memory Jogger (2nd Edition),Canada, GOAL/QPC
  2. Value Based Management.net (2012). Discounted Cash Flow – DCF. Retrieved from http://www.valuebasedmanagement.net/methods_dcf.html
  3. Schmidt,Marty (2012).Discounted cash flow (DCF) / NPV / Time value of money concept. Retrieved from http://www.solutionmatrix.com/discounted-cash-flow.html
Advertisements

W13_TP_SAP Cost Commitment

Background

SAP is a new ERP system implemented at One of Biggest Mining Company at Indonesia since mid of 2011.

SAP adopted to replacing another ERP system with purpose to have better system of ERP and has integration system across Subsidiary Company in the world. The system will become the global solution ERP for entire company world wide.

In Project, we know about Cost Committed, there are costs, usually fixed costs, which the management of an organization has a long-term responsibility to pay.

However, some of committed cost at SAP can be overdue and confusing project manager while he/she prepares the forecast budget reporting.

Feasible Alternative

There are some alternative on how managing Cost Committed at SAP.

  1. Using T-code CJI5
  2. Using Business Intelligent Report
  3. Using Own Template Report

Selection Criteria

In this blog, will explain about why commitment cost not accurate at SAP and how is the action plan developed to solve the problem.

Assessment

In SAP Commitment management, data from the following SAP components is processed integrally:

  1. Controlling

         Commitments are displayed either on internal orders, cost centres, or projects.

  1. Material Management (MM)

         Commitments are created through purchase requisition and purchase order.

However, there are several problems occurs when project manager wants to manage his commitment cost at SAP due to not consistently traffic section to manage the date of commitment. The impact is commitment cost not accurate in the SAP reporting.

Figure 1 Interrelationship Diagram of SAP Cost Commitment Problem

Analysis

The main problem for Cost Commitment not update at SAP so far is due to traffic management not consistently update the PO Date then impacted to overdue commitment.

Project manager will hard to define the forecast report since most of outstanding PO not delivers the correct date of delivery and receiving at site.

Below is action plan in matrix responsibility for Commitment cost managing using own template report since other alternative can’t be optimizing to make commitment cost updated at SAP report.

Figure 2 Matrix Responsibility

Conclusion

Commitment cost is very important information for project manager during his time to managing his/her project at SAP. The accurate Cost Commitment will deliver accurate forecast report and Estimate At Completion number at project reporting.

Continues Improvement

Maintain the own template consistently and working together with traffic section to ensure update regularly of PO due date from vendor is the most sustaining activity should be following up to ensure commitment cost can be used perfectly by project manager.

References:

  1. Brassard, M and Ritter, D (2010), The Memory Jogger (2nd Edition),Canada, GOAL/QPC
  2. Venture Line(2012). Committed Cost Definition. Retrieved from http://www.ventureline.com/accounting-glossary/C/committed-costs-definition/
  3. SAP AG (2001). Commitments Management. Retrieved from http://help.sap.com/printdocu/core/print46c/en/data/pdf/COKAO/COKAO.pdf
  4. Prasetyo, Topan (2011), How to make commitment cost update at SAP, personal communication, December 14, 2011.