Capital Plan

• John Maynard Keynes

Financial analysis is essential to ensure that all material capital investment and divestment decisions are grounded in sound financial principles. There is often a tendency to build models with excessive detail, causing decision-makers to lose sight of the bigger picture. A strong financial model is less about complexity and more about asking the right questions—ensuring that no critical issues are overlooked and that key assumptions are properly reflected in the analysis.

When assumptions are logically validated and supported by multiple sources, finance leaders must be prepared to stand firm behind the conclusions. As Warren Buffett observed, “Any business craving of the leader, however foolish, will quickly be supported by detailed rate-of-return and strategic studies prepared by his troops.” What Warren wants to remind us is that the institutional imperative could have a big influence.

Any output, such as NPV, IRR, or EVA, represents only one possible outcome and is highly dependent on underlying assumptions. Sensitivity analysis would help provide vague direction. For major investment initiatives, conducting post-investment or post-mortem analyses is invaluable in testing and refining those assumptions. It is also worth noting that, particularly for innovative entrepreneurs, intuition may underline certain assumptions, though it should still be examined critically.