Capital Efficiency

5 Best Practices for Capital Allocation

Capital allocation is a key priority for CFOs. Thoughtful, proper strategy around capital allocation can lead to outsize growth and long term competitive advantages. To support finance teams in this strategic planning process, we put together 5 best practices:

Don’t fall into the sunk cost fallacy. When reevaluating existing practices or systems, always ask why. Are we employing these workflows or solutions simply because we always have? Or is there a deeper, more tangible efficiency and ROI benefit?

Create plans for the next 3 years. Since budgeting is usually done on a quarterly or annual basis, a lot of great investment is forgone because their results are not immediately visible in the bottom line the next quarter or the next year. While it is important and more practical to plan the immediate future in greater detail, incorporate high level but quantitative plans for the next 3 years. In this way, you place guardrails for your team to start truly thinking more long term and optimizing for a 3 year rather than 3 month period.

Don’t forget about talent. Capital allocation conversations are typically centered around financial resources, but capital allocation should include human capital as well. Use capital allocation planning time to touch base with the chief people officer or head of talent as well as the leaders of each department to ensure that the right people are in the right positions and working on the projects that best align with their talents.

Engage cross functional groups in intermediate check ins. Instead of having one big annual strategy meeting to determine forward looking capital allocation, set up informal cross functional meetings to check in and discuss intermediate progress and opportunities for improvement every few months. Bake this into the culture and the norm of the company to encourage people to think about these critical issues outside of just the one year mark. In this way, you develop a culture of innovative thinkers, create individuals who take ownership of their department’s capital allocation, and make more time for strategic planning year round.

Look outwards. Too often, capital allocation is mistaken for a purely internal exercise. While the decisions only impact your company, they should be based on in-depth understanding and deep dives of competitor benchmarking, industry insights, customer feedback, and macro trends. Spend meaningful time immersing yourself and your team in these reports before beginning to discuss capital allocation strategy. Make sure your capital allocation decisions are rooted in data points from this research.

Bring these 5 best practices to your next leadership discussion to level up your capital allocation strategy!

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