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Developing a Business Case
The business case provides the business rationale, normally in financial terms, of why a project should be done.
When to Use Business Cases
A business case is normally used in one of two contexts. The first is when the business is determining how to allocate resources on projects. The business case of each project is reviewed to determine which projects provide the best return on investment. The other time the business case is used is when a business is seeking to fund a project using external funds (from outside investors or from funding sources such as parent companies or customers). The business case provides the financial justification for why someone would want to fund the project. Many businesses will require a business case for a project for that project to be included in the annual OpPlan.
Build your business case using this four step process.
Step 1: Identify the business need or opportunity.
This step is usually done by the business unit who is the primary beneficiary from the project. Typically the need or opportunity is either an element of the business strategy or is driven by a problem or issue within the business. The need should include some type of financial benefit.
Step 2: Develop option(s) to meet the need.
This step is usually done by the organization or organizations that will conduct the majority of the project work. For instance on a new product development project, step 1 may have been completed by marketing or product management, but step 2 will be completed by research and development or engineering. At least one high level option is identified. Multiple options may be identified. If so, steps 3 and 4 will be done for each option and presented to the stakeholders along with the risk of each option for them to make a decision between options. This step is often integrated with elements of project initiation and planning.
Step 3: Estimate relevant cash flows.
Estimate all the project costs or expenses for each option. Estimate the types of financial benefits for each option, such as cost savings or new sales. Normally detailed project planning has not been done yet, so these are just rough estimates – one or two significant digits. These estimates typically are made for multiple years.
Step 4: Determine ROI and make a recommendation
Use the organization’s preferred Return on Investment (ROI) technique, such as breakeven, payback, NPV or IRR. Based upon the ROI calculation, make a recommendation as to whether project should be approved and funded or not.
Hints and Tips
- The estimated cash flows only need to be rough numbers, not detailed estimates.
- The project estimated cash flows need to be spread across the number of years that are planned for the project duration.
- The benefit cash flows need to be spread across the number of years that the business will receive benefit. It is common for the benefit cash flows to change annually based upon forecasted sales or cost savings opportunities.
- The ROI techniques will be discussed in more detail in another module. However all of the techniques will need the same basic information – project costs and benefits allocated by year.
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