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Business Case Financial Analysis: Step-by-Step Guide

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15-3-2024

If you are in charge of a business case, then you will need to quantify the financial value that this project represents for your organization. This article will give you some hints on how to do that.

As a business leader, you know that business cases are used to evaluate opportunities and projects and decide whether to accept or reject them.

The business case is a set of documents describing a new project opportunity or a significant change in an existing project and provides the rationale justifying that project. In addition, the business case quantifies the financial value. It is a formal statement of the need to invest, and the recommended option has been carefully analyzed and is supported by solid business reasons.

The business case analysis evaluates the impacts, outcomes, and benefits. It provides the rationale for why a project should be undertaken and serves as a basis for decision-makers to decide whether funding, resources and investment be made available and whether the project should proceed.

You need to know your stuff, crunch those figures, and make sure your business case calculations are on point. Because when it comes to making a business case, you can't afford to get it wrong. But it's not just about the numbers. You need to tell a story with your business case calculations, paint a picture of success, and convince others that the opportunity is worth investing in. It's about presenting a compelling case that leaves no room for doubt.

If you are in charge of the business case, you will need to quantify and monetize the financial value this project opportunity represents to inform decision-making better. This article will give you some insights on how to do that.

(When you are done, check out My Business Case Hub® for a complete set of resources, templates, and tools for writing, developing, and managing your business case.)

The Step-by-Step Guide to Financial Analysis

1. Quantify and monetize the value of the project opportunity

Business Outcomes and Benefits

How do you quantify and monetize the value of an opportunity, a new project or an investment? What is the business value of this outcome or that benefit?

We need clear and explicit definitions of Outcomes and Benefits to answer such questions.

Outcome: The result of the change derived from implementing the project. Example: Shorten the average sales cycle time by 30%.

Benefit: The measurable benefit resulting from an outcome. Example: Increase sales revenues by 10%.

These definitions are the business case metrics and provide the practical basis for measuring, valuing, monetizing and comparing all outcomes and benefits, financial and non-financial.

Monetizing the Outcomes & Benefits

Quantifying and monetizing the business outcomes and benefits is central to strategic planning, cost-benefit analysis, and business case analysis. Therefore, it is critical to gain a solid understanding of the main drivers of the business case.

To develop a robust business case, you must model the business case drivers that drive the strategic and operational outcomes and monetize the financial outcomes and benefits.

The business case drivers are:

The key inputs and activities drive the business case's strategic, operational and financial outcomes.
They have a significant impact on outcomes & benefits.
They are controllable by the business case.

Before building the financial model, you will need to create a revenue or operational model for the business case drivers to evaluate the relative strengths and weaknesses to make the best choices about the business case in monetizing the outcomes and benefits.

While Creating the Spreadsheet Is Easy, Building the Model That Monetizes the Business Drivers, The Outcomes, And Benefits Is Not — It Is Most Definitely Necessary.

2. Determine the financial, strategic and societal value

Financial Benefits and Non-Financial Benefits

Quantifying how the business case opportunity will create long-term value and grow the business to thrive in today’s volatile and uncertain business environment is essential.

Project benefits can be classified into several categories.

Most organizations readily accept positive financial outcomes as business benefits. These are easy to measure in cost and productivity savings, revenue growth, cash flow, or profits. Moreover, the financial benefits are traceable to a line item/s in the financial statements (P&L, Cash Flow, Balance Sheet).

New disruptive societal trends, such as climate change, energy transition and social inequality, impact companies in virtually every industry and sector. At the same time, companies are increasingly evaluated on their sustainability performance. In these types of business cases, the project benefits are strategic, societal impact or other. Although these non-financial benefits may be immediately apparent, there may be some uncertainty about measuring or valuing and taking time to quantify.

Financial Value Is Not Always the Most Important Value in Business Cases.

It is essential to understand and differentiate between different types of benefits. Here is an example of financial, strategic, social impact and other benefits.

Financial Benefits Include:

Revenue/Sales
Cost avoidance or reduction
Productivity improvement
Profit
Cash flow
Working capital
Asset value

Strategic Benefits Include:

Accelerated investment
Brand
Business model
Capability, Capacity
Customer experience and satisfaction
Employee experience and satisfaction
Entering new markets or customer segments
Expansion
Innovations, new products and services
Product and service quality
Risk management
Supply chain
Sustainability

Societal Impact Benefits Include:

Employment growth
Increased procurement of local manufactured goods and service
Environmental and Societal Responsibility (ESR)
Environmental, Social and Governance (ESG)

Other Benefits Include:

Regulatory compliance
Risk management
Suppliers
Social licence

Financial Forecasts and Financial Projections

Financial terms are easily confusing and often used interchangeably, so be careful! However, phrases like "financial forecast" and "financial projection" that sound similar are pretty distinct.

Financial forecasts are estimates of future financial outcomes for companies. It predicts what will happen in your company’s future based on things that have occurred in the past.

Projections explore different scenarios to reveal a wide range of possible business outcomes, whether the assumed circumstances become true if they come to pass or what your company hopes will occur in the future.

In summary, a projection outlines financial outcomes based on what could possibly happen. In contrast, a forecast describes financial outcomes based on what we expect will actually occur under current conditions, plans, or intentions.

Forecasts and projections can be combined in the business case to create a complete picture of how things might play out over time.

3. Determine the capital expenditure (CAPEX) for the project opportunity

The project cost or capital expenditure (CAPEX) includes all up-front development expenditures required to achieve the forecasted benefits, such as the acquisition of land, construction costs, plant and equipment, legal and consulting fees, contingencies, and the residual value and costs of disposal at the end of the option's life.

The project cost also includes project management costs and several contingency factors.

We outline the project's key milestones and describe the major activities to achieve each milestone. We then develop the overall project timeline, the work breakdown structure and project activities in a Gantt chart format.

We calculate the cost of the project work based on the following:

Resources, including the type and quantity of workers needed.
Effect (days) required to perform the work.
Cost rate per resource.

Once the work is defined to a detailed level, it should be reasonably easy to determine these project work costs and add them to the overall CAPEX model.

4. Calculate the return on investment (ROI) for the project opportunity

The financial analysis includes revenue forecast and projections, business operating and financial models. The revenue model is essential in business cases for new products and services and market expansion.

The financial analysis assesses the benefits and costs and expresses them in terms of today's money ('net present values'), providing a standard metric for comparing all business case options.

Cash flow analysis is the fundamental building block of financial analysis. The analysis identifies all incremental cash flows that would accrue to, or be incurred by, the organization as a direct result of the option. This involves determining project costs, residual values, annual operating costs and revenues.

Identifying the financial assumptions that provide the foundation for projecting the outcomes and benefits is essential.

The quality and reliability of the analysis will depend on the following:

Accuracy of the estimates on which the cash flows are based.
Identification of all relevant cash flows.
Exclusion of all non-cash items.
Avoiding double-counting.
Determining the appropriate timeframe.

Discounted Cash Flow Analysis

Discounted cash flow (DCF) is a financial valuation method used to estimate the value of the business case investment based on its expected future cash flows.

DCF analysis attempts to figure out the value of an investment today based on projections of how much money it will generate in the future. DCF analysis involves calculating the discounted cash flows for a project using a risk-adjusted discount rate.

The discounted cash flow should include:
•         Net Present Value (NPV)
•         Internal Rate of Return (IRR)
•         Discounted Payback Period
•         Profit to Investment Ratio

The discounted payback period gives the number of years it takes to break even from undertaking the initial CAPEX expenditure by discounting future cash flows and recognizing the time value of money.

The profit-to-investment ratio measures profitability by comparing the cash flows created by the project to the initial CAPEX investment.

Scenario Analysis and Sensitivity Analysis

Scenario analysis examines and evaluates the options and possible scenarios that could take place. Therefore, we recommend that all business cases evaluate three or more scenarios or options, including the do-nothing option, a do-minimum option, and a do-something innovative or transformative option.

Sensitivity Analysis examines how sensitive the potential outcomes of an option are to the underlying assumptions. Thus, it enables explicit recognition of the uncertainty of the investment outcomes.

The Tornado Chart is a valuable tool for sensitivity analysis to compare the relative importance of the different variables in financial analysis.

5. Financial analysis for decision-making and business benefits realization

The financial analysis used in business cases is used to evaluate the many opportunities and projects for decision-making purposes. In addition, business leaders and external stakeholders use it to understand and evaluate the financial performance of the business case recommendation and the long-term business value.

There are several reasons for creating the financial analysis. The most obvious is quantifying a project's or investment's expected financial value. Subsequently, different options are evaluated and compared based on the financial, strategic, and societal value created. This is the basis for decision-making and selecting the recommended option. This is the stage before project initiation.

The financial analysis results also serve as a baseline for measuring the success of the project or investment. This is known as business benefits realization and evidence-based Cost Benefit Analysis. In addition, it helps project managers, sponsors and other stakeholders measure, monitor and manage the value a project created against the original business case.

What Is Business Benefits Realization?

Business Benefits Realization measures the outcomes and benefits delivered from implementing the project and evaluates the outcomes and benefits against the business case. The business benefits realization process provides the organization with the tools to define and measure success.

What are the strategic outcomes realized from the project?
What are the measurable benefits realized?
What are the lessons learnt?

Financial Analysis Resources

My Business Case Hub® - Financial Analysis Tool

My Financial Analysis is an advanced tool designed to simplify developing the financials required for business case.

It’s ideal for both new and experienced users who are actively creating their business cases, providing all the financial insights necessary for a compelling business case.

This powerful tool replaces cumbersome spreadsheet models with a faster, more accurate, and user-friendly approach.

Create comprehensive financials in under 3 minutes, streamlining your business case process with efficiency and precision.

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The Six Essential Business Case Templates

Creating a consistent and reliable approach to quantifying the financial value in business cases is essential.

Our 6 Essential Business Case Templates provide a proven structure for developing, evaluating, and writing the recommendations to proceed with the innovation, project or investment. In addition, business case templates serve as a valuable resource to use across all your projects. Some organizations have different business case templates, each designed for various types and sized projects.

You can download our proven business case templates here.

Financial Analysis Templates

It is crucial to quantify the project's financial and non-financial benefits as much as possible in the business case.

The detailed financial templates show precisely what cost and benefit information, and evidence is required; so that you do not miss any of the hidden costs or benefits.

The financial analysis templates include a discounted cash flow model ("DCF model") to value the business case by forecasting its' cash flows and discounting the cash flows to arrive at the current, present value.

The financial analysis templates calculate the discounted cash flow for determining the following:

Return on investment
Operating, investing & financing cash flows
Net present value
Internal rate of return
Payback period
Profit-to-investment ratio

The financial analysis templates include a business case financial analysis summary dashboard with the scenario and sensitivity analysis for evaluating the financial implications and increasing the return on investment.

Discounted Cash Flow Templates - Scenario Analysis

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Get the Business Case Templates

The Financial Analysis in Business Cases Workshop

The need to justify new technology investments with a formal business case is often a requirement for any major innovation or IT project. In addition, the business case is often the only formal mechanism to evaluate a new project's business opportunity, assess the project's risks, and get approval for funding and resources.

The Financial Analysis Workshop is where you get help creating a business case for a new investment initiative. The workshop is a deep dive into the financial analysis techniques used in successful business cases.

We’ll help you create a robust and business-focused case that makes it easy for you to get funding for your project. You will learn how to structure the financial analysis, what information you need to include, how to present your information, and how to ensure that your business case is successful.

We’ll help you develop a comprehensive business case to get funding for your project.