A Project Is Expected To Produce Cash Flows Of Five Business Case Mistakes and How to Avoid Them

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Five Business Case Mistakes and How to Avoid Them

Business case analysis has become essential for critical decision-making and planning in government, business, and nonprofit organizations everywhere. As a result, most of the case-building responsibilities now belong to people who are not “finance” people.

Everyone talks about the business case but surprisingly few people know what it means. This was true in the early 1900s, when case analysis was born along with a new, developing discipline called finance. In those days, most people thought that case analysis was “finance”. He felt that the task of preparing and using case judgments should be left to economic experts.

The lack of case understanding in 2013 is also widespread, but there is a difference: most professionals called upon to prepare or use case results today are people who do not practice finance for a living. They usually have little or no financial background. They are product managers, project managers, agency directors, sales people, engineers, training consultants and many other things that are not “finance”. Now they are asked to tie their hair. When their case fails, they ask: What happened?

Fortunately, the difference between strong hair and weak hair has little to do with meaning and everything to do with understanding a few simple elements of hair design. To help you understand why, consider briefly the “Top Five” list of common business case mistakes.

Mistake 1: Thinking is “finance” and is a job for financial experts

For those who make the case for decision support or planning, the challenge is not economic mathematics. A case can use some simple financial metrics to communicate results, but the main challenge is determining which costs and which benefits are there in the first place. It is not finance. It is a matter of systematically and thoroughly identifying all the important consequences of the proposed action.

Equipped with a few simple tools such as cost models and “benefits logic”, for example, the task of making sure that everything relevant to the case is straightforward and clear (sometimes it can be tedious, but it is straightforward and clear).

Mistake 2: Projecting immediate income instead of cash flow

People may think that the primary result of the analysis is the pro forma income statement. In business, however, the fundamental metric is cash flow, not income. why

First, many cases look at the consequences of actions that have little or nothing to do with income generation, especially in governmental or non-profit organizations. Beyond this, however, evaluating costs and benefits in terms of cash flow is a direct measure of the value of each item. Income (or profit), on the other hand, is a less direct measure, as income reflects accounting rules such as allocated expenses, depreciation expense, and so on. These factors “muddy the waters” when trying to measure the actual consequences of one action or another.

If the decision maker wants to know what the proposal will do for the rate reported income, you can include a projected income figure in addition to the expected cash flows. But cash flow, not income, is the most obvious answer to the fundamental question: Is this a good business decision?

Mistake 3: Omitting situations that address the main question

We propose actions to try to achieve something better, cost savings, improved service quality or increased sales revenue. Action aimed at any of these objectives requires at least two scenarios: a “proposition” scenario and a base case or “business as usual” scenario (sometimes the base case is called the “as is” scenario or the “current” course and pace). Is a “business as usual” scenario really necessary?

The terms “savings,” “improved” and “increase” are relative. We have to ask: savings, related to what? Improvement, relative to what? What does it grow on? “What” is a base case scenario that shows the consequences if the proposal is not implemented. A base case scenario is indispensable if one wants to know how much things will change.

Mistake 4: Using financial metrics blindly

A business case is not an exercise in finance (number 1 above) but can use some simple financial metrics to 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’ve heard senior managers say, for example: “We’ll pick investments with the best ROI,” or “We won’t make any major expenditures unless the payback period is 18 months or less.”

Should important business decisions really turn on one or two such solutions?

Each financial metric has a strong point: it tells you something useful about projected cash flows that might not be evident from the cash flow figures themselves. However, every financial metric also has weaknesses: each can mislead you if used blindly. Different metrics in the same project cash flow statement, moreover, can point in different directions: one action has a high ROI but a low NPV, while another action has a low ROI but a high NPV. What metrics do you follow?

Also, each metric can be defined in different ways. And, there is a lot of bad or just plain wrong guidance coming from seemingly respectable case building tools on the market. One vendor’s tool, for example, tells you that IRR is “… capital outlay vs. cash flow received over time.” You should know that IRR has many definitions but that is not one of them. Following this kind of guidance will not increase your credibility.

You don’t need an MBA to create or use a business case. You should have a comfortable, definition-level understanding of some simple business solutions and their strengths and weaknesses.

Mistake 5: Omitting important benefits because they are “soft benefits” or “intangibles.”

There is a widespread belief that some of the benefits (positive contributions to the achievement of business objectives) of the actions under analysis are second-class citizens. Unfortunately, real contributions to important goals are sometimes labeled “soft” or “abstract” and excluded from the case.

“Soft” usually means “probable” or “not financially measurable.” The word “intangible” means “nothing to touch,” with no evidence that the benefit exists. Many people use it when they really mean “non-financial”. If there is no objective measurable evidence that a benefit exists, then yes, it is abstract and not relevant to the case. However, when the organization has important business objectives related to customer satisfaction, branding, image, quality, safety, risk reduction, employee satisfaction, professionalism or other outcomes first defined in non-financial terms and when a proposed action contributes to these objectives, Contributions can be both significant and tangible–even if they are not monetary. Does your proposed action contribute to one of these goals? If so, the benefit belongs to the case!

Remember that assigning a monetary value to benefits should be one of the last links in the case structure, not the first: if you can demonstrate in tangible terms that your proposal contributes to a business objective, then the benefit is real.

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