Anticipate the hazards ahead for your business case. Don’t let your business case crash!
Business case support is becoming mandatory for leaders in government, business, and non-profits everywhere.
As a result, case building is no longer just a job for Finance in the back office. Case building responsibility now belongs to those who propose and those who take action. Csse building therefore is the job of those who manage projects, programs, and products. And, it is also the job of agency directors, sales people, engineers, trainers, and many others. Now, it is they who must build the case.
We see many of these people in our business case seminars. Some are there because they’ve just experienced business case failure and they need to answers to questions like these: What happened? How do I avoid this kind of disaster next time?
Why do so many cases fail?
To help understand some of the most frequent reasons for business case failure consider briefly a “Top Five” list of common business case mistakes.
Mistake 1: Thinking it’s it’s a job for financial specialists.
Those who build the business case for decision support or planning purposes are sometimes surprised to learn that the primary case-building challenge is not financial mathematics. The case may use a few financial metrics to communicate results, but the central challenge is deciding which costs and which benefits belong in the case in the first place. That is not finance. It s a matter of identifying all the important consequences of a proposed action, systematically and thoroughly.
Equipped with a few simple tools like the cost model and a benefits rationale, for instance, the task of ensuring that everything relevant comes into the case is straightforward and clear—if you understand the cost model concept and the rationale for valuing business benefits.
https://www.business-case-analysis.com/business-benefit.htmlMistake 2: Projecting income instead of cash flow.
People may think that the primary result of the business case is a pro forma income statement. For the business case, however, the fundamental metric is cash flow, not income. Why?
First, many cases look into the consequences of actions that have little or nothing to do with producing income, especially in government or non-profit organizations. Beyond this, however, evaluating costs and benefits in terms of cash flow is a direct measure of each item’s worth. Income (or profit), on the other hand, measures less directly, because income reflects accounting conventions such as allocated costs, depreciation expense, and others. These factors “muddy the waters” when trying to measure consequences that actually follow from one action or another.
You may include a projected income figure besides the expected cash flow if decision makers want to know what the proposal will do for reported income per se. But cash flow, not income, provides the clearest financial answer to the basic question: Is this a good business decision?
Mistake 3: Omitting scenarios that address the main question.
Businesspeople usually propose actions in order to make improvements. They propose actions to achieve cost savings, improve service quality, or grow sales revenues, for instance. As a result, the case for actions aimed at any of these objectives needs at least two scenarios: a “proposal” scenario and a base case or “business as usual” scenario. Some first-time case builders ask: Is the “business as usual” scenario really necessary?
Savings, improve, and increase are relative terms. We have to ask: Savings, relative to what? Improve, relative to what? Increases over what? The “what” is a base case scenario that projects consequences if the proposal is not implemented. The base case scenario is indispensable if you want to know how things will change.
Mistake 4: Using financial metrics blindly.
The business case is not an exercise in finance (No. 1 above) but it may use a few simple financial metrics to help show the meaning of projected cash flow values. Some popular financial metrics include ROI (return on investment), IRR (internal rate of return), NPV (net present value), TCO (total cost of ownership) and PBP (payback period). I have heard senior managers say, for instance: “We’ll choose the investment with the better ROI,” or “We don’t undertake any major spending unless there’s a payback period of 18 months or less.”
Should important business decisions really turn on one or two such measures?
Each financial metric has strong points: Each tells you something about projected cash flows that might not be apparent from the cash flow figures themselves. However, each financial metric also has weak points: Each can mislead you when used blindly. Different metrics from the same projected cash flow statement, moreover, can point in different directions: one action has a high ROI but low NPV, the other action has a low ROI but high NPV. Which metric do you follow?
Also, each metric can be defined in several different ways. And, there is a lot of bad or just plain erroneous guidance coming from superficially respectable business case tools on the market. One vendor’s tool, for instance, tells you that IRR “…is cash flow received over a period of time vs. capital outlay.” You should know that that IRR has several definitions but that is not one of them. Following that kind of guidance will not enhance your credibility.
You don’t need an MBA to build or use the business case. You do need a definition-level command of a few simple business metrics and their strengths and weaknesses.
For more on choosing and using financial metrics, see Financial Metrics.
Mistake 5: Omitting “soft” or “intangible” benefits.
Many business people treat some business benefits as second-class citizens in the case. Unfortunately, they sometimes label real contributions to important objectives “soft,” or “intangible.” Sometimes they leave them out of the case altogether.
- “Soft” usually means “unlikely” or “cannot be measured in financial terms.”
- The term “intangible,” means there is “nothing to touch,” no evidence that the benefit exists.
Many people use these terms when they really mean “non-financial.” If there is no objective evidence that a benefit exists, then yes, it is truly intangible. And truly intangible benefits do not belong in the case.
Most businesses believe they must pursue objectives for such things as:
- Customer satisfaction.
- Risk reduction.
- Employee satisfaction.
Business people almost always defined and measure these in non financial terms. Even so, reaching these objectives can be important. And, reaching objectives can have value.
Does your proposed action contribute to one of these objectives? If so, the benefit belongs in the case! If you can show in tangible terms that your proposal contributes to a business objective, the benefit is real.
For more on valuing financial and non financial benefits, see Business Benefits.
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