Building the Non Profit or Government Business Case Presents a Challenge
When they must produce a cost/benefit analysis, or a business case, these worlds come face to face with a special issue. And that challenge is completely unknown to their counterparts in private industry.
- How do you write a business case if you are not in business?
- Can find find financial benefits besides cost savings?
- Do standard financial metrics such as NPV, IRR, or ROI have meaning in the not-for-profit world?
Questions like these come often these days from leaders in government, education, community service, and the rest of the non profit world. These questions bring many to our business case seminars.
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Many come from government and non profit organizations that are driven by non financial objectives. Where, then, are the business benefits they need for the business case?
On one hand, more and more spending decisions must be justified and documented with business case analysis. Starting with the Klinger-Cohen Act of 1996, for instance, US Government organizations have faced a steady stream of new laws, directives, and guidelines requiring responsible decision making and business case accountability.
On the other hand, government and nonprofit organizations are not in business to grow sales, increase earnings or build owners equity. Those are the primary sources of business case benefits for a profit-making company. They are not an option for the government or nonprofit organization trying to justify funding proposals, projects, or initiatives.
Funding requests and project proposals from these groups often do aim for cost savings. The Navy, for instance, might want to fund a project that aims for lowering the daily operating cost for a ship at sea. More often, however, the request or proposal has objectives such as “Increased readiness of a military unit,” or “Lower risk of mission failure.” They define success criteria for such objectives in terms of non financial key performance indicators, and financial benefits are nowhere in sight.
When cost savings and other financial benefits are nowhere in sight, however, case builders ask: Is there still a business case for going forward?
Whose Benefits Belong in the Government or Non Profit Business Case?
Earlier this year I spoke with the Director of a small nonprofit local service organization whose board had made the “impossible” demand. She wanted to buy a specialized software application for the group’s one computer. The board wanted a business case.
This group collects surplus food from restaurants and food stores and then brings it to homeless and other very needy people. Unpaid volunteers provide the labor. Grants from local business cover the use of a small office and other expenses. As a result, financial action in this group is almost non-existent.
The Director believed they could increase service volume by 30 to 40% or more with the help of the management software—through better planning, and coordination. But the software vendor was not interested in donating the package. Purchasing would create the largest single line item in the annual budget. It was not going to save any money and there are no sales revenues or profits to look for.
How on earth,” the Director wanted to know, “can we justify this with a business case?
The answer is “no way” if the case looks only at the costs and benefits for the organization itself. I suggested she take the question to her board members while building the case. It was very necessary that they agree on the answer to this question:
Whose benefits belong in the case?
That question is central in every public case. Whose benefits belong in the case? The right answer to that question makes possible the business case.
Ask: Whom Do You Serve?
By law and by policy, most government groups must consider the groups they serve when showing value they deliver. However, many are not fully aware of this principle or how to apply it in the business case. Fewer such laws apply in education, charities, or other nonprofits, but the rule applies equally there.
Whose benefits belong in the business case? You cannot answer until you address two other questions.
- What is your mission?
- Whom do you serve?
Ask: What is Your Mission? What Are Your Objectives?
Before deciding whose benefits belong in the case, ask if the proposal action can help you:
- Firstly, accomplish your mission
- Secondly, meet other important objectives?
- Thirdly, improve service delivery?
- Fourthly, improve service quality?
- Fifthly, deliver new services?
- Sixthly, lower the risk of failure?
- Finally, solve known problems?
If the answer is Yes to any of these, the benefit belongs in the business case (see Business Case Essentials for examples). Then, to find business case benefits, ask, what is that worth to the people you serve?
The non profit director had no trouble showing a very large ROI for the software, once she and the board agreed they should measure benefit value in terms of food deliveries to people. Once cash flow estimates for costs and benefits enter the pubic service case, the analyst can apply the same metrics that serve private industry. These may include popular cash flow metrics such as:
- Return on investment (ROI).
- Net present value (NPV).
- Internal rate of return (IRR).
- Payback period.
Note that the Director had to agree with the board on the meaning of value while building the case. Otherwise, there would have been no business case. Note firstly that value is in the eye of the beholder. Remember secondly that case builders must establish and confirm that value before they deliver case results.
The Government Business Case: Take Action! Further Resources:
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