What is “stay in business” capital

 

Stay in business capital (SIB) refers to continued investments made by a company in relation to an existing facility or industrial plant in order to exploit changed market circumstances or new market opportunities.  SIB projects need to be controlled properly in order to preserve scarce capital, but many companies are faced with a situation where the lines between SIB and maintenance is blurred, and the cost controls are lacking.

At the outset of a business, once the initial business opportunity has been identified, a company usually embarks on a capital project eventually resulting in a running production plant, or mine, or industrial facility.

Because of the scale, this initial capital project is managed using formal cost engineering and project control processes. Most of the technical problems are resolved during commissioning; and expenditure in this regard is allocated either to the initial project capital budget (which includes a commissioning budget) or later on to the operating budget of the business (maintenance, repairs and operations).

Once the plant is running, MRO (operating budgets) are used for raw materials, fixed and variable costs, repairs and preventative maintenance etc.

During operations new opportunities to improve the business are inevitably identified which then require additional investment that falls outside what is considered “maintenance”.

These investments are typically categorised into minor capital and major capital projects.  The specific criteria, terminology and approval processes will differ between organisations. The investments are often called “SIB” or “Stay in Business”, but the principle is the same: they are identified and subject to an internal motivation and “approval for expenditure” process before resulting in a small capital project.

SIB projects involve capital (as opposed to operating expenditure) and are in principle treated in the same way as any project; except that they are smaller and usually involve tying into an existing operating plant. The business case is normally based on the incremental impact on the underlying business (such as increased throughput, improved quality, customer service levels, safety etc).

What are the challenges around managing stay in business projects?

In a tough global economic climate, capital is hard to come by and must be treated as a very scarce resource. Investments need to be supported by a business case the same as a larger project. SIB projects are unique in many cases because of their close integration into existing site infrastructure or running plant; and this has an operational, safety and environmental impact that needs to be carefully assessed. Because of their relative small scale, SIB projects can involve part time engineers with other responsibilities and smaller contractors; yet the rigour of engineering design, procurement and construction cannot be compromised. Often new technologies are introduced into existing operations requiring new skills and operating procedures that differ from what the operations staff are typically used to and this needs to be factored in the planning.

The temptation sometimes is to treat SIB projects as an extension of traditional maintenance activities and try to manage this manually with the same systems and procedures for purchasing etc used in the operating business. This is normally a bad idea because projects frequently run over multiple financial accounting periods, commitments need to be tracked ahead of purchase orders and tied to a project schedule, the equipment needs to be properly capitalised on the asset register and the project forecasting needs to be accurate so that the expenditure is managed and controlled.

SIB capital must be directed at opportunities that either improve the plant performance (increased throughput or quality etc), or introduce new products or services to customers. SIB capital should not be used to merely keep the existing plant running – this is maintenance and not investment.

A standard process for business case development and motivation is needed for SIB projects, frequently this is prescribed in the form of a procedure. However calculation of contribution in terms of NPV and other financial metrics is sometimes not done adequately, nor are there standards adhered to in a company. Documentation around SIB projects is often not consolidated into the corporate knowledge base and information management is fragmented and ineffective.  Champions of the business case for their pet projects can overstate the impact to get the project approved without adequate objective assessment.

This is further complicated if a company comprises of many divisions operating in different geographies or regions. SIB projects might be approved without adequate consideration of the return on investment and even worse, capital might be used to maintain equipment, the budget for which should have been catered for as maintenance and repairs.

The problem is compounded when there are multiple smaller SIB projects taking place simultaneously resulting in a portfolio of projects that involve shared resources and competing objectives.

Clearly some form of system standardisation would go a long way in resolving these challenges.

How Costrac can help

Costrac is designed to manage project expenditure the way projects themselves are managed. Based on the WBS and cost break down structure, Costrac is able to track and manage procurement, commitments and actual expenditure, as well as forecast project outcomes early enough to take corrective action where necessary. Costrac operates over the lifetime of the opportunity even when this extends over month and year end in a business; and feeds financial information back to the existing financial systems in line with these requirements.

Costrac is ideal for managing SIB projects and is highly recommended as an alternative to manual processes that link to the existing business accounting systems. By standardising the SIB processes many of the challenges explained can be overcome. By implementing best practices in cost engineering and control, the organisation can capture and retain information on the costs of technical equipment in a way that facilitates future estimating.  The desktop edition of Costrac is suitable for those small projects that are run in remote locations or from a single office,  and the server edition caters for the most complex scenarios.

 

Example Dashboard

The system can also be used to formalise the NPV (net present value) calculations that form part of the business case motivation.

NPV Screenshot

 

Eigasoft has been working with customers for over three years who are combining Costrac with simple approval workflows to manage the process of motivating, approving and controlling capital expenditure that forms part of the companies SIB investment.

If you would like to know more about how Eigasoft can help you with your SIB projects please leave get in touch.

If you have any comments or suggestions on how this article can be improved, please leave a comment below.  If you find this article interesting please share.

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