What happens if your CAPEX budget is cut first thing tomorrow morning?

500 million becomes 425 million euros. Which projects stay – and which ones have to go?

BOARDROOM QUESTIONS
The questions your portfolio should be able to answer.

Monday morning. 8.30 am.

The Executive Board meets.

The strategic plan is in place. The investment programmes have been prepared. The business units have submitted their projects. Finance and Controlling have been crunching the numbers for months.

The planned CAPEX budget:

500 million euros.

Then the situation changes.

Demand is weaker than expected. Financing costs are rising. Cash flow must be protected. The market is changing. The Executive Board decides:

CAPEX is reduced by 15 per cent.

The figure

drops

from 500 million euros to 425 million euros.

75 million euros must be cut from the portfolio.

What now?

Which 75 million euros will you cut?

It is precisely at this point that it becomes clear whether a company actually has a controllable CAPEX portfolio – or merely a collection of approved investment projects.

The seemingly simplest solution is:

Cut everything by 15 per cent.

Each business division bears its share.

Every investment programme is scaled back.

Politically, this may seem convenient.

Economically, however, it is by no means necessarily the best approach.

After all, projects differ.

They differ in terms of their capital requirements, their expected contribution to earnings, their resource requirements, their interdependencies, their strategic importance and their risks.

A linear budget cut treats different investments as if they were economically equivalent.

They are not.

A new budget requires a new portfolio

When the amount of available capital changes, it is not just a single figure in the budget that changes.

The entire scope for decision-making changes.

A project that was part of an attractive portfolio at 500 million euros may no longer belong to it at 425 million euros.

At the same

time, a project that was not previously considered may suddenly become part of a better combination under the new budget constraint.

Why?

Because capital allocation is combinatorial.

It is not simply a matter of removing the 75 million euros with the lowest individual ROI.

The aim is to identify, from the 425 million euros, the combination of projects that forms the best possible portfolio within the defined objectives and constraints.

500 million euros

Let us imagine a simplified company with an investment portfolio comprising production, automation, digitalisation, infrastructure, energy, new sites and strategic growth projects.

Given a CAPEX limit of 500 million euros, a specific combination of projects emerges.

This combination fulfils, for example,:

budget

limits, resource constraints, project dependencies, strategic minimum requirements and other defined conditions.

The portfolio has been calculated for this initial scenario.

Then the board changes a single figure:

CAPEX: EUR 500 million → EUR 425 million

The question now is not:

“Where do we cut EUR 75 million?”

The better question is:

“What does our best portfolio look like with EUR 425 million?”

That is a fundamental difference

When cutting back, you start with the existing portfolio and remove projects.

When reallocating, you start with the new conditions and recalculate the portfolio.

Cutting back asks: What do we take away?

Optimisation asks: What would we finance today under these conditions?

This can lead to completely different results.

Project A may not remain Project A

Suppose a major investment project requires 60 million euros.

It has an attractive business case and was therefore originally approved.

Under the new budget, however, the same sum could enable several other projects whose combined contribution is greater.

Or Project A is a prerequisite for Projects B and C.

In that case

,

cancelling it could have repercussions for further investments.

Or a smaller project requires a scarce technical resource that is simultaneously needed for a strategically more important project.

Or certain investments are mandatory under regulatory requirements and cannot be cancelled at all.

CAPEX cannot therefore be managed effectively solely on the basis of individual project metrics.

The portfolio must be viewed as a system.

What does the reduction actually cost?

The obvious answer is:

75 million euros less in CAPEX.

But that merely describes the change in the budget.

For the Executive Board, another figure may be more important:

How much expected portfolio value is lost as a result of the reduction?

Assuming that the optimised 500-million portfolio has a defined expected portfolio value.

The same decision-making model is then recalculated with a budget of 425 million euros.

The difference between the two solutions highlights the economic or strategic consequences of the budget decision within the model.

This allows the Executive Board not only to see how much capital is saved.

It also enables them to see what this saving costs in terms of the portfolio.

Perhaps 425 million euros is too little

The result may spark an interesting discussion.

Perhaps the company saves 75 million euros in CAPEX, but in doing so loses a disproportionately high expected value contribution.

In that case, a different budget limit could be examined.

450 million?

440 million?

425 million?

400 million?

A different optimal combination of projects may result for each budget limit.

This transforms a general discussion of the budget into a quantitative capital allocation decision.

Where is the critical threshold?

The question becomes particularly interesting when different levels of CAPEX are compared.

At what level of budget reduction does the portfolio change only slightly?

At what point must a strategically important project be abandoned?

When do resource conflicts arise?

When do project dependencies break down?

And at what point does every additional euro saved in CAPEX lead to a disproportionate loss in the expected portfolio value?

The budget is thus no longer merely an upper limit.

It becomes a variable in the strategic decision-making process.

And now the CEO asks the next question

425 million euros are displayed on the screen.

The portfolio has been recalculated.

The Executive Board can see which projects are changing.

Then the CEO asks:

“What happens at 450 million?”

New calculation.

The CFO asks:

“What if we increase our minimum liquidity at the same time?”

New calculation.

The COO asks:

“What happens if this production capacity absolutely must be maintained?”

New calculation.

Strategy asks:

“What if growth in Market A is given higher priority?”

New calculation.

This is

precisely where the function of an executive board meeting changes.

From reporting to the decision-making forum

Traditionally, many board meetings are conducted using pre-prepared scenarios.

Base case.

Best-case scenario.

Worst-case scenario.

Perhaps two additional variants.

However, as soon as a question is asked that falls outside these pre-prepared scenarios, a new cycle of analysis often begins.

Finance carries out the calculations.

Controlling consolidates the figures.

Business units provide new data.

Presentations are adapted.

Management is waiting for the next basis for decision-making.

The question arises today. The answer comes later.

CAPEX Live Boardroom Simulation takes a different approach.

The question changes the model.

The model recalculates the portfolio.

The Executive Board compares the consequences.

And makes a decision.

Question. Calculate. Compare. Decide.

The speed of the calculation affects the quality of the discussion

This is not about an algorithm taking over the board’s decision-making.

On the contrary.

Management continues to decide on strategy, objectives, priorities, assumptions and constraints.

But the consequences of changed assumptions can be made immediately visible.

This allows the discussion to shift from opinions on possible impacts to a comparison of calculated alternatives.

The algorithm does not make decisions.

It keeps the decision-making space calculable.

What if the cut were 17 per cent rather than 15 per cent?

Or 12 per cent?

Or if the budget remains unchanged, but funding costs rise?

Or if a strategic project suddenly becomes mandatory?

Or if a production facility becomes available six months later?

Or if the board changes the weighting of a strategic objective?

Each of these changes can result in a different combination of projects.

A static portfolio answers static questions.

A dynamic decision-making model can recalculate for changed conditions.

StratePlan: Calculating the portfolio for the new reality

StratePlan models CAPEX and project portfolios under defined budgets, economic or strategic targets, resources, dependencies and other quantifiable conditions.

If management changes any of these conditions, the portfolio can be optimised again under the new parameters.

From:

500 million euros in CAPEX.

becomes:

425 million euros in CAPEX.

But the crucial outcome is not just the new budget figure.

The crucial outcome is:

the corresponding portfolio.

What if your CAPEX budget were cut tomorrow morning?

500 million EUR → 425 million EUR.

Then you shouldn’t start by asking which department has to give up 15 per cent.

Ask:

Which combination of projects would we choose today if 425 million euros had been our budget from the outset?

Because when conditions change, it is not just the budget that should be adjusted.

The portfolio needs to be rethought.

Management defines the new reality.

The maths calculates the consequences.

The Executive Board decides.

DON’T TRUST US. CALCULATE IT.