Business Case Development Toolkit (with Excel model)

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Any project requiring a non-trivial investment must be supported by a robust business case to justify the economics of this pursuit. This toolkit outlines the objectives, components, and processes involved with business case development. Furthermore, it includes a working, consulting quality capital budgeting business case model (Excel financial model).

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Business Case Development Toolkit (with Excel model)

  1. 1. PowerPoint Diagram Pack Business Case Development Toolkit Any project requiring a non-trivial investment must be supported by a robust business case to justify the economics of this pursuit . This toolkit outlines the objectives, components, and processes involved with business case development. Furthermore, it includes a working, consulting quality capital budgeting business case model (Excel financial model). <ul><li>Check out our site for all your PowerPoint needs! </li></ul><ul><li>http://learnppt.com – Find our ebook on creating effective and professional presentations. Covers basic to advanced concepts, including storyboarding, diagramming, and the Consulting Presentation Framework. </li></ul><ul><li>http://learnppt.com/powerpoint -- Shop our catalog of Diagram Packs. We try to add more Packs monthly. All of our diagrams are professionally designed by ex-management consultants from top firms. </li></ul>Bottoms-up Benefits Case Business Modeling Top-down Business Case Financial Analysis BUSINESS CASE ELEMENTS
  2. 2. Browse our catalog of PowerPoint Diagram Packs http://learnppt.com/powerpoint Join our mailing list and receive the Basic Toolkit for free ! http://learnppt.com/mailinglist Read our eBook – How to Become a PowerPoint Guru http://learnppt.com/
  3. 3. Contents <ul><li>Overview 4 </li></ul><ul><ul><li>Executive Summary </li></ul></ul><ul><ul><li>Objectives </li></ul></ul><ul><ul><li>Business Case Stream Charter </li></ul></ul><ul><li>Quantitative Analysis Elements 9 </li></ul><ul><li>Business Case Modeling 15 </li></ul><ul><li>Sample Business Case Model (Excel document) 24 </li></ul><ul><li>Final Words 30 </li></ul><ul><ul><li>Dos and Don’ts </li></ul></ul><ul><ul><li>Common Pitfalls </li></ul></ul><ul><ul><li>Rules of Thumb </li></ul></ul>
  4. 4. The business case stream identifies areas of opportunity and quantifies the improvement potential <ul><li>Identify major areas of revenue and cost assets and their key drivers </li></ul><ul><li>Identify true value (i.e. revenue and costs): </li></ul><ul><ul><li>By function/activity </li></ul></ul><ul><ul><li>By process </li></ul></ul><ul><ul><li>By product/client type </li></ul></ul><ul><li>Quantify the financial impact of improvement opportunities from streams </li></ul><ul><li>Validate business case and gain sign-off </li></ul>OBJECTIVES CRITICAL SUCCESS FACTORS <ul><li>Understanding of the business case within the project </li></ul><ul><li>Access to key data and knowledge holders within client </li></ul><ul><li>Availability of key resources to validate findings </li></ul><ul><li>Timely input from streams </li></ul>SCOPE <ul><li>Summary analysis of costs and revenues </li></ul><ul><li>Detailed analysis of operating costs </li></ul>DELIVERABLES <ul><li>Detailed breakdown of current costs and revenues </li></ul><ul><li>Quantification of financial impact of early wins </li></ul><ul><li>Benefits case estimate for improvement potential in costs and revenues: </li></ul><ul><ul><li>Including payback periods </li></ul></ul><ul><li>Input to design of benefits-tracking mechanism </li></ul>ACTIVITIES <ul><li>Conduct focus interview </li></ul><ul><li>Analyze financials </li></ul><ul><li>Build business model </li></ul><ul><li>Build top-down business case </li></ul><ul><li>Analyze benefits from team </li></ul><ul><li>Build bottoms-up benefits case </li></ul><ul><li>Prepare business case for benefits-tracking </li></ul>Business Case Stream Charter THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  5. 5. The structure of a business case is built on a combination of four separate, yet interlinked, quantitative analysis elements The extent of each element varies from case to case—but, they are always there. Enabling Element Core Deliverables Quantitative Analysis Elements THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Bottoms-up Benefits Case Business Modeling Top-down Business Case Financial Analysis BUSINESS CASE ELEMENTS
  6. 6. Each of the analytical elements has different objectives and requires different types analyses Financial Analysis Business Modeling Top-down Business Case Bottoms-up Benefits Case OBJECTIVE ANALYSIS Quantitative Analysis Elements – Objectives THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ <ul><li>Opportunity charts </li></ul><ul><li>Opportunity selection, prioritization, and phasing modeling </li></ul><ul><li>What level of benefits do we commit to achieve? </li></ul><ul><ul><li>Develop fields of opportunities </li></ul></ul><ul><ul><li>Identify the origins of the low performance </li></ul></ul><ul><ul><li>Quantify and validate the identified opportunities </li></ul></ul><ul><li>P&L and Balance Sheet impact estimation </li></ul><ul><li>Cash flow NPV modeling </li></ul><ul><li>ROI calculation </li></ul><ul><li>What are the challenges and associated costs? </li></ul><ul><ul><li>Establish the link between the financial analysis and the bottoms-up business case </li></ul></ul><ul><ul><li>Fine tune the business drivers </li></ul></ul><ul><ul><li>Understand the economics of the business </li></ul></ul><ul><ul><li>Quantify the preliminary amount of accessible benefit </li></ul></ul><ul><li>Linked sensitivity analysis </li></ul><ul><li>Valuation modeling </li></ul><ul><li>Scenario modeling </li></ul><ul><li>Optimization analysis </li></ul><ul><li>What could potentially happen to the company? </li></ul><ul><ul><li>Understand the future scenarios </li></ul></ul><ul><ul><li>Set the aspiration </li></ul></ul><ul><ul><li>Quantify the risks </li></ul></ul><ul><ul><li>Focus the strategic analysis </li></ul></ul><ul><li>Financial reporting </li></ul><ul><li>Ratio analysis </li></ul><ul><li>Breakdown ROCE (DuPont analysis) </li></ul><ul><li>Stakeholder value calculations </li></ul><ul><li>Simple sensitivity analysis </li></ul><ul><li>What is going on in the company? </li></ul><ul><ul><li>Understand the business </li></ul></ul><ul><ul><li>Create urgency </li></ul></ul><ul><ul><li>Quantify the competition gap </li></ul></ul>
  7. 7. The top-down business case and the bottoms-up benefits case are two very different beasts that are often confused Top-down Business Case Bottoms-up Benefit Case = = A collection of analysis stream findings translated into financial and non-financial improvements Explains why getting these benefits matters to the business <ul><li>Top-down approach </li></ul><ul><li>Models the impact on financial statements </li></ul><ul><li>Relates delivery to strategy </li></ul><ul><li>Is an executive steering group process </li></ul><ul><li>Bottoms-up approach </li></ul><ul><li>Displays mixed benefit formats </li></ul><ul><li>The logic is as important as (if not more important than) the numbers </li></ul><ul><li>This is a work stream process </li></ul>The two components are highly inter-dependent, but it is important to understand the distinction and that work is structured around it. Quantitative Analysis Elements – Top-down & Bottoms-up Approaches (2 of 3) THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  8. 8. The combined top-down and bottoms-up approaches triangulate to form the final business case Final Top-down Business case Final Bottoms-up Benefits Case Aspiration Hypotheses Benchmarks Baseline Implementation Prioritization Leveraging the Opportunities Analysis Preliminary Top-down Benefit Evaluation Benefit Scope by Area Final Business Case Realized Benefits Focus on Major Benefit Levers $$$ Bottoms-up Approach Top-down Approach Proposed Issues Quantitative Analysis Elements – Top-down & Bottoms-up Approaches (3 of 3) THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  9. 9. Any financial and quantifiable benefit must fall into one of five benefit categories Quantifiable Non-quantifiable Categorize the financial, quantifiable benefits into the 5 benefit categories for structure in the financial model. All Financial and Quantifiable benefits must fall into 1 of 5 benefit categories BENEFIT CATEGORY DEFINITION 1 2 3 4 5 Phase 1, 2 – Financial Decomposition & Opportunity Identification THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization Non-financial Financial Capture qualitatively Capture qualitatively Capture qualitatively Capture quantitatively Similar to Cost Avoidance, but avoiding a capital expense (as defined by Corporate Finance/Accounting) Capital Avoidance Similar to Cost Reduction, but reducing a capital expense (as defined by Corporate Finance/Accounting) Capital Reduction This benefit will allow the company to avoid (i.e. eliminate) a cost completely Cost Avoidance This benefit will reduce (but not eliminate) a cost Cost Reduction This benefit will increase revenues (e.g. service upsell) Revenue Enhancement
  10. 10. These benefits must then be quantified and translating into specific financial impacts Phase 3 – Opportunity Quantification Categorize the financial, quantifiable benefits into the 5 benefit categories for structure in the financial model. PROFIT & LOSS IMPACTS BALANCE SHEET IMPACTS CASHFLOW IMPLICATIONS Gross benefit Investments Net benefit Quantifiable Non-quantifiable <ul><li>Ultimately, benefits must be quantified and translated into impact on the company’s financials </li></ul><ul><ul><li>P&L impacts </li></ul></ul><ul><ul><li>Balance Sheet impacts </li></ul></ul><ul><ul><li>Cash Flow implications </li></ul></ul><ul><li>Analyses should be presented within the context of investment required and timeframe for benefits realization (e.g. payback period) </li></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization Non-financial Financial Capture qualitatively Capture qualitatively Capture qualitatively Capital Avoidance Capital Reduction Cost Avoidance Cost Reduction Revenue Enhancement
  11. 11. It is critical to validate the legitimacy of identified benefits, as well as the legitimacy of its calculations Phase 4 – Benefit Validation An invalid benefit results in an invalid business case—executives will not believe your numbers if they don’t believe in the benefits. Define Benefit X Define calculation for Benefit X Valid? Valid?  Define Benefit Y Define calculation for Benefit Y Valid? Valid?  Define Benefit Z Define calculation for Benefit Z Valid? Valid?  Validate the legitimacy of the identified benefit Validate the legitimacy how you are planning to calculate the benefit <ul><li>Validation of both the benefit itself, as well as how its calculated is a crucial step </li></ul><ul><li>If executive members or key stakeholders do not agree with the benefit or its calculation, they will not believe in any of your resulting financial analysis </li></ul><ul><li>Validate first before proceeding with financial modeling </li></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization
  12. 12. The financial modeling process involves calculating key financial metrics, such as ROI and Payback Period Phase 5 – Business Case Finalization Define key assumptions and financial metrics to drive financial modeling COMMONLY USED FINANCIAL BUSINESS CASE METRICS Source: Investopedia (for more information) If these concepts are new to you and unclear, examine the calculations used in the embedded Excel model (on slide 25). THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization This is the time it takes for a project to recover its initial costs and start generating a positive return for the company. Since most models are set at a 5-year horizon, the payback period should occur within 5 years. Payback Period ROI is a performance measurement of how profitable the project or investment was. It is a percentage symbolizing the profit as a percentage of total investment. Usually, we calculate the ROI for the snapshot at the end of the 5-year timeframe. Return on Investment (ROI) NPV is a concept used to measure present value of future cash flow. This is done by discounting the cash flow by the discount rate. E.g. with a discount rate of 10%, the NPV of $5MM in year 2 is $5MM/(1 + 10%) 2 Net Present Value (NPV) By definition, this is the minimum acceptable rate of report for any internal project that the company takes on. This is defined by Corporate Finance and for most companies, it is 10% (annually). This value is crucial, as it drives all the key financial calculations (e.g. NPV, ROI). Discount / Hurdle Rate Most business case for capital budgeting models have a 5-year timeframe. Timeframe
  13. 13. The financial model provides a summary of the benefit case, cost of investment, and calculated financial metrics to help drive to a decision Phase 5 – Business Case Finalization Financial Benefits Breakdown of the quantifiable, financial benefits broken down by Revenue Impact, Cost Impact, and Capital Impact Cost of Investment Breakdown of the costs involved Cash Flow Analysis Core Financial Metrics Source: This screenshot is taken from the Excel spreadsheet included with this presentation (slide 25) THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Financial Decomposition Opportunity Identification Opportunity Quantification Benefit Validation Business Case Finalization
  14. 14. As you identify potential benefits, map these benefits against the attributes of quantifiable and financial Sample Business Case Model Double click to open the Excel financial model NOTE : If you are having trouble opening the embedded Excel file, you can download it online at this web address: URL REMOVED FROM PREVIEW THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  15. 15. The first tab, Overview, presents the financial summary—and is the report presented to executives Sample Business Case Model – Documentation (2 of 4) <ul><li>The model is divided into the following sections: </li></ul><ul><ul><li>Revenue Impact (pulled directly from the “Revenue Enhancements” tab) </li></ul></ul><ul><ul><li>Cost Impact (pulled from the “Cost Benefits” tab) </li></ul></ul><ul><ul><li>Capital Impact (pulled from the “Capital Benefits” tab) </li></ul></ul><ul><ul><li>Cost of Investment (pulled from the “Cost of Investment” tab) </li></ul></ul><ul><ul><li>Cash Flow analysis </li></ul></ul><ul><ul><li>Financial metrics </li></ul></ul><ul><li>The first 4 sections are all formula based—the only modifications you should make are to add or remove line items, which will need to tie to the supporting tabs </li></ul>1 2 3 4 5 6 1 2 3 4 5 6 <ul><li>There is only 1 key assumption value that requires customization, the “Discount / Hurdle Rate” value (highlighted in yellow) </li></ul><ul><li>There are 2 additional sections to add qualitative detail ( “Details” at top right, “Assumptions” at bottom left) </li></ul>OVERVIEW TAB 7 8 7 8 <ul><li>Notice that the yearly discount factors assume the cash flow is averaged over the year </li></ul><ul><li>This is why the formula in cell D43 has a power of 0.5 and not 1 </li></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  16. 16. Your benefits should be clearly defined—both in terms of definitions and calculations—remember, these need to be validated Sample Business Case Model – Documentation (3 of 4) BENEFIT TABS <ul><li>There are 3 Benefit Tabs: </li></ul><ul><ul><li>Revenue Enhancements – includes all identified revenue enhancements </li></ul></ul><ul><ul><li>Cost Benefits – includes both Cost Reductions and Cost Avoidances </li></ul></ul><ul><ul><li>Capital Benefits – includes both Capital Reductions and Capital Avoidances </li></ul></ul><ul><li>Each of these 3 tabs is structure the same </li></ul><ul><ul><li>At the top, tabulate all your assumptions </li></ul></ul><ul><ul><li>Your assumption values are indicated by yellow cells and should be clearly defined </li></ul></ul><ul><ul><li>Below the assumptions are your actual benefits </li></ul></ul><ul><ul><li>Each benefit has its own section in blue, which contains 4 sub-sections: the name of the benefit (darker blue), benefit description (light blue), calculation details (gray), calculated values over 5 years (white) </li></ul></ul><ul><ul><li>The Excel formulas for the calculations should not contain any numbers—only references to assumption values identified in the top section </li></ul></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  17. 17. … and avoid the common pitfalls! <ul><li>“ Oh data, you wanted me to get data!” </li></ul><ul><ul><li>Lots of war stories but no data </li></ul></ul><ul><li>“ There is no data” </li></ul><ul><ul><li>Sadly, too often this means the speaker is too lazy to plug through reams of paper to get at the data </li></ul></ul><ul><li>Staying in data gathering and analysis mode </li></ul><ul><li>Stating the obvious </li></ul><ul><ul><li>“ Increasing margins will improve profits.” </li></ul></ul><ul><ul><li>We are looking for the “So-Whats”—keep on digging until you find them. </li></ul></ul><ul><li>Finding a gold mine and quantifying the value of the shack built on it </li></ul><ul><ul><li>Too often we get bogged down in the detail and forget the bigger picture </li></ul></ul><ul><li>“ Validate, validate, validate—oh, does that mean I should have validated my analysis?” </li></ul><ul><ul><li>People are validation—averse because they do not understand the process or are afraid it will be abused </li></ul></ul><ul><li>Letting the team dictate where the benefits will end up </li></ul><ul><li>Not plugging in to the authorisation network and selling strategy discussions </li></ul><ul><li>Staying holed up and not understanding each study’s findings and opportunities </li></ul>COMMON PITFALLS Common Pitfalls THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  18. 18. END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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