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How to Begin Building a Capital Plan

Tips for formulating the multi-year capital plan to maximize budget

Paula McDaniel, PhD

Paula McDaniel, PhD, spent 23 years in corporate analytical and product development groups at Air Products after receiving her PhD in Physical Chemistry (University of Illinois, 1988). In 2011, she...

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A technology organization’s laundry list of bright, shiny, new capabilities does not constitute a capital plan. Your responsibility, as lab manager, is to balance those ideas with company needs and budgetary constraints without quenching your organization’s drive for technology advancement. The wish list is an input; however, a capital plan is a multi-year scheme reflecting timing, overall cost, and monthly depreciation. 

Before starting the prioritization process, understand the size of your budget. This sounds like a simple question, but is more involved than many recognize. Start with some self-education around your company’s financial standards including depreciation and expense guidelines. Depreciation reflects the number of years over which the purchase payments will be spread out. For example, depreciating $500k over five years means that you will carry $100k/year or approximately $8,300/month for 60 months on the budget. In addition, correctly categorize purchases as capital versus expense to minimize big one-time hits to your budget. Question your assumptions about what falls into these categories by working with your procurement partners. 

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Next, build a capital plan baseline by listing current equipment and monthly cost until fully depreciated. It’s common to use a three- or five-year period as the capital planning window; however, this timeframe might vary depending on depreciation norms. Budgetary openings for newly approved purchases will then become apparent. When the prioritized new capital list is available, start slotting in their acquisitions and timing. Recognize that newly purchased equipment depreciation doesn’t start the day you place the order. The clock starts when the item is installed, so factor in gaps between order date and delivery/installation. Using this level of granularity will help you avoid leaving capital dollars unused during any given month. 

It's common to use a three- or five-year period as the capital planning window; however, this timeframe might vary depending on depreciation norms.

After establishing the capital plan baseline, prioritize creating a capital list. Starting with your team’s wish list, organize proposed capital purchases according to categories such as replacement, new technology (current need), or new technology (future need). Don’t forget aspects such as “revenue generation”, “cost to operate”, and “failing equipment replacement” in accurately reflecting the criticality of a purchase. Additionally, questions such as “Is there a better way to get the same info?”, “Should I add features such as automation?”, or “How much is the current equipment being used?” can be used to question assumptions. Pick categories that work for you and your operation. This process is a valuable team-teaching tool to create buy-in and alignment around company technology goals. 

Finally, as you pressure test each potential investment, consider outsourcing as a stop-gap option. If capital budget is limited, accessing the capability through a third party will ensure the purchase works as advertised on your systems.  Working with a partner in this way can uncover needs for training, additional accessories, or facility modifications. Using a contract research organization also fills the time gap between purchase and installation, which can be substantial in some cases. Additionally, many vendors offer a rent-to-own option allowing you to meet the competing constraints of capital budget and need urgency.

A capital plan built on sound financial understanding is key to balancing your team’s dreams with company constraints. Frequently revisit this evergreen document as unexpected opportunities will occur with changes in company direction, instrument health, or delivery delays. Engage the broader community (management, customers, and the technical team) to create prioritization buy-in and to ensure it reflects the future-looking needs of the organization.