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The business case provides the business rationale, normally in financial terms, of whether the project should be done.
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Quick reference
Creating a Business Case
The business case provides the business rationale, normally in financial terms, of whether the project should be done.
When to use
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.
Instructions
Definition
Business Case: “A documented economic feasibility study used to establish the validity of the benefits of a selected component lacking sufficient definition and that is used as the basis for the authorization of further project management activities.” PMBOK® Guide
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.
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 case 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.
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 funded or not.
This definition is taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017.
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- 00:05 Hi, I'm Ray Sheen.
- 00:06 I'd like to talk now about another aspect of project initiation, and
- 00:10 that's the development or creation of a project business case.
- 00:14 The project management body of knowledge of PMBOK Guide defines a business case as,
- 00:20 a documented economic feasibility study used to established validity of
- 00:25 the benefits of a selected component lacking sufficient definition and that is
- 00:30 used as the basis for the authorization of further project management activities.
- 00:36 The Project Business Case is our financial rationale to explain whether or
- 00:39 not we should do the project.
- 00:41 Will this project make money or lose money?
- 00:44 And normally,
- 00:45 a Project Business Case is developed with a cross-functional team working together
- 00:50 so that the impacts in each department or function are included in the analysis.
- 00:55 The Project Business Case describes the opportunity or
- 00:57 need in financial terms by identifying the new revenue or cost savings.
- 01:03 It also describes the cost of doing the project in financial terms,
- 01:07 by creating a high level estimate of cost in time, not a detailed one,
- 01:12 we haven't done a detailed project plan yet.
- 01:14 So we won't have that detailed estimate yet.
- 01:18 I recommend a four-step approach to creating the project business case.
- 01:22 First, identify the need or opportunity.
- 01:25 Once that is done, develop the options for meeting that need.
- 01:28 Now, for each of the options, estimate the cash flow.
- 01:32 That means, you estimate the project costs and
- 01:34 the project benefits over a period of time.
- 01:37 Finally, determine the return on investment, the ROI.
- 01:41 And make a recommendation as to which option the business should select.
- 01:45 Let's look at each of the steps in more detail.
- 01:48 The first two steps are the opportunity and options.
- 01:51 This is the creative part of developing a project business case.
- 01:55 Step one is to identify the business need or opportunity.
- 01:59 This is normally done by the business unit who receive the benefits.
- 02:02 By that I mean it's the department of function that is responsible for
- 02:06 managing the benefit stream created by the project.
- 02:09 So if it's a new product development project.
- 02:11 It's often sales and marketing that identifies the opportunity, if it's a cost
- 02:16 improvement project, is often the operations that will have a lower cost,
- 02:20 that identifies the opportunity.
- 02:22 Many times the opportunity is a result of the strategic plan.
- 02:25 The project is to implement a portion of the business strategy such as a strategy
- 02:29 to establish new markets and reposition the business project lines.
- 02:34 Sometimes the need or
- 02:35 opportunity is reaction to an issue in the business environment.
- 02:39 The project may be needed because of a regulatory change or an old technology may
- 02:43 no longer be supported and the systems or products may need to be upgraded, and
- 02:48 sometimes the need is based upon business performance gaps that
- 02:51 have been identified to improvement processes such as Lean Six Sigma.
- 02:55 Once the opportunity is identified,
- 02:57 the next step is to develop options that will address the need or opportunity.
- 03:02 This activity is normally led by the function with the primary project effort.
- 03:06 For systems projects, it's IT, and for development projects it's engineering.
- 03:10 At this step, there's a lot of discussion to understand the projects objective,
- 03:15 boundaries, and the assumptions.
- 03:17 The people doing this step want to make sure that the project
- 03:20 concept they propose, and analyze is responsive to the need.
- 03:24 Taking time at this step to clearly understand and
- 03:27 communicate with the department, that identified the opportunity in Step One,
- 03:31 will be of tremendous value in the project planning and execution processes.
- 03:36 This step is integrated with classic project initiation and
- 03:40 to some degree project planning activities.
- 03:42 So do this step well.
- 03:44 Its not just to functional bureaucracy.
- 03:46 The results are used by your team as you move forward into detailed planning.
- 03:52 Lets keep going.
- 03:53 The next step is to create the estimate that we will use for the ROI analysis.
- 03:58 We do this by estimating the relevant cash flows,
- 04:01 that means we estimate the increases or sources of cash due to the project,
- 04:06 and we estimate the decreases, or uses of cash while doing the project.
- 04:11 It's important that we estimate all the increases and decreases, and
- 04:15 that we estimate them for
- 04:16 the time periods of both the project activities, and the project benefits.
- 04:21 What I mean by that is that if the project is a product development project,
- 04:24 the estimate needs to include how much sales and
- 04:26 profits will be realized from the product, for
- 04:29 the first several years after the product has been introduced to the market.
- 04:33 Increases in cash are due to increased sales or
- 04:35 lower costs, either way the business has more money to work with.
- 04:39 Again, in addition to the amount you need to estimate when the benefits will start
- 04:44 and how long they will last.
- 04:46 Decreases in cash or project costs, and the implementation cost of the project.
- 04:51 Don't forget to include any long term maintenance or
- 04:54 operating cost that the business must now pay for.
- 04:58 This estimate is best done with the cross functional team
- 05:00 to make sure that the financial impact in all of the business functions
- 05:04 is correctly reflected in the financial estimates.
- 05:07 Once the cash flow estimates are determined, they're rendered into
- 05:10 a spreadsheet, and the return on investment or ROI is calculated.
- 05:14 There are several dynamic return on investment techniques that are used for
- 05:18 project business cases.
- 05:19 Each has advantages and disadvantages.
- 05:22 Use the one that your business is most comfortable with.
- 05:25 Once you have the numbers in the spreadsheet,
- 05:27 the calculations are actually very straightforward.
- 05:31 Finally, select the option that has the best return on investment and
- 05:34 make the recommendation.
- 05:36 If recommending an option that does not have a good ROI,
- 05:39 you should have a strong rationale and be prepared for some tough questions.
- 05:45 Project business case is a great technique for
- 05:47 communicating the financial impact of doing a project.
- 05:51 It explains the opportunity, the project approach, the constant benefits,
- 05:56 and the language of business which is money.
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