NucleusResearch.com | Building a financial business case
:: Building a financial
Gather initial costs and costs
for the first 3 years. Keep
these 2 numbers separate.
Finance is not trendy. ROI and payback have been
around since the beginning of time.
2% 567% 9134%
It's not the highest ROI that wins, or the The average annual benefit over three
lowest ROI that loses, it's the most believable years divided by the initial cost. This is an
annual number directly comparable to the
ROI that drives a successful business case. cost of capital or other bank investments.
1025% 24567% 673% 4114%
35% 44% 2387% 622% :: PAYBACK PERIOD
The time from the point the project is
Estimate the total benefits
through year 3. deployed until the cumulative net
monthly benefits equal the initial
1 or 2 benefits drive 2 or 3 benefits
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3 support the
ROI case studies
Focus on making More than 5 benefits and you’ve
the few important probably made a mistake.
benefits stronger. Check references
Results of a pilot site
Benchmark and industry data
It’s easy for people to understand payback. “How long
until we cover our costs?” is the question to answer first.
Calculate the average annual benefit by
subtracting total 3‐year costs from the
total 3‐year benefits then dividing by 3.
For the skeptical calculate a worst case ROI and payback.
Presenting a good “worst” case can show that the
downside of the project is not that bad. BENEFITS
Direct benefits include immediate
reductions in costs or
Calculate the ROI by dividing
the average annual benefit by increases in profit.
the initial cost. Direct benefits usually
HAZARDS make up less than 50%
Without a residual value in the payment stream NPV Indirect of the total project benefits.
will undervalue a project. Better to use ROI. benefits
Use benchmark data only to typically make up
validate your own estimate. more than 50% of the benefits
IRR is not ROI, it’s just NPV solved for (i). It’s often and include productivity gains
mistakenly used as ROI. and expectations of future profit.