What directors should know about capital already committed
The board approves a budget reduction. Management later explains that much of the expenditure is already committed under contracts. The apparent saving was never fully available.
Before changing priorities, directors need a view of the choices the organisation can still make. A budget records an approved plan. Contractual commitments, cancellation costs and operating dependencies affect how much of that plan can actually change.
Ask for a view beyond spending to date
For significant investments, show expenditure already incurred, future amounts committed and further expenditure still subject to approval. Keep the time periods and definitions consistent so the figures can be reconciled.
Explain conditional commitments separately. A future payment may depend on a milestone, an extension or an option being exercised. Leadership needs to know which event creates the obligation and who is authorised to trigger it.
The relevant finance and legal teams should establish the basis of the information. A project manager's estimate of what can be cancelled may differ from the contractual position.
Put exit costs beside the remaining cost
Consider an illustrative technology programme with a substantial supplier contract and several internal dependencies. Stopping the programme may avoid some implementation spending while leaving termination charges, data migration work or continued operation of the old platform.
Continuing also has consequences. The original programme budget may exclude the staff and operating expenditure required to obtain its benefits. The comparison should include those future costs where they affect the decision.
Avoid treating sunk expenditure as a reason to approve more spending. Explain what has already been spent, but assess the next choice using the future consequences of each available option.
Check the portfolio relationships
A project that looks optional on its own may enable several others. Conversely, several teams may each assume that another budget pays for a shared dependency. Bring those assumptions together before making reductions.
Show significant commitments by entity where that distinction matters. A group-level view can hide which business holds the obligation, which expects the benefit and which would have to provide funding if the plan changes.
This does not require the board to review every purchase order. It requires management to explain the commitments that materially constrain strategic choices and to identify uncertainty in the data.
The G20/OECD Principles place annual budgets and oversight of major capital expenditure within the board's strategic responsibilities. A useful management report connects those approved plans to the commitments made in carrying them out. [1]
At the next budget revision, ask how much proposed spending remains a genuine choice. That answer should shape the discussion before the headline reduction is agreed.
[1] G20 OECD Principles of Corporate Governance 2023 responsibilities of the board Read the source
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