Seven steps to improve cost justification

Investment & Cost ™

Justifications
Kotan Australia P/L
(ATF 2P&M Family Trust)
A.B.N 32 567 237 240

Seven Steps to Improved Cost Justification that can be
Applied to Any Initiatives
Many hours or days can be wasted, because contrary to popular
belief using numbers only to tell a story usually fail.

Preparing cost justifications can be a daunting task for both
the uninitiated and the seasoned veteran when the rules of
engagement are not clear.

Numbers are only part of the complete story and with either
too much or too little information your proposal won’t get
across the line. Many a company struggle to get cost and
investment projects approved, or go through multiple cycles,
taking months or even years, before they have an acceptable
ROI analysis and finally have capital funding allocated to the
project.

Sometimes, of course, the problem is quite simply that the
ROI for the project is poor or not as compelling as other
potential company investments that they competing
against. However, there are common mistakes that many
individuals or teams make within in the cost justification
process that actually hinder their chances of getting even
projects with solid financials approved.

There is a solution to this problem, which is a simple
seven step process that can help maximize the
opportunity of getting your project approved and
funded.

1. What is Your Company’s Investment Analysis Model:
I know this sound like common sense but you would be surprised,
it is not common practiced. Understand your company’s investment
analysis model. It is normal for company’s to have their own approach on
how they look at the returns from capital project proposals.

This will involve the type of financial calculations used (IRR-Internal Rate
of Return, Simple Payback Period Calculation, NPV-Net Present Value,
DCF-Discounted Cash Flow, etc.) and also the preferred/ required
structure of supporting documents and presentations.

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Justifications
Kotan Australia P/L
A.B.N 32 567 237 240

Be sure to ask what the current standards are (they can
change, especially when there has been a change, i.e. CEO or CFO
position), and ask for example documents for project proposals that were
approved, regardless of which area or department generated them.

2. Connect Your Project Funding to Key Corporate
Strategies and Objectives:
There are usually many projects competing for
limited funding, don’t fall into the trap of just look
at your project in isolation. Projects are seldomly
approved based purely on ROI. If a project can be
clearly linked to the bigger corporate picture, i.e.
strategies and objectives and has both a financial
and strategic fit, it has a much better chance of
being approved.

Many managers often fail to see that what is important to them or what
may seem like a “no brainer” to them as financial investment just isn’t on
the radar or on the executives’ priority list no matter how strong the ROI.
You must make the connection to what’s important to them, don’t forget
it can make them look good or bad as well!

3. Develop a Strong Summary with Detailed Back Up:
Applications for funding often go astray as they don’t have the level of
details right. Usually, this is as a result of putting in too much detail for
executive presentations. Unfortunately, the assumption that more is better
quite often backfires.

People will be become bored quickly, as a result of being unable to
distinguish the forests from the trees, executives won’t be able to really
focus on the numbers from their perspective, or understand what is truly
driving the need for the project.

The opposite is also a common mistake where sometimes presentations
are harmed by not having enough backup detail, just in case some
executive decides he or she would like to understand what is really behind
a summary savings calculation.

You need both, placed appropriately in documents and presentations.
Remember you are seen as the expert by the executives and are expected
to know all the information.

4. Understand the Benefits, Don’t Leave Any on the Table:
A mistake commonly made in investigating project benefits is not
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Justifications
Kotan Australia P/L
A.B.N 32 567 237 240

understanding fully where all the opportunities for
savings are located.
Looking solely at a project’s impact within the affected area only has and
will always sell the potential benefits of the project short. Having a narrow
focus of view on the impact of the project will leave money on the table.

Understand the true value and benefit of the
project by reviewing “The Value Proposition”
for all internal (other departments) and
external (suppliers and customers)
stakeholders. This will quickly highlight areas
of additional savings that are traditionally
missed, e.g. transactions, floor space,
transport, lead times, etc. as these all are
potential savings or lost opportunity costs /
revenue.

5. Use the Numbers to Tell a Story:
In most cases, the numbers alone are not enough to get a project
approved. Every company has multiple investment opportunities, each of
which wouldn’t make it very far if the ROI did not appear to be strong.

Not all of these projects can or will be funded. It is as important to get the
“narrative” or the “pitch” of the project right as it is to show a strong
return on investment. After you have crunched the numbers, it is critical to
work just as hard on “what is the story” behind the project. Be clear as to
why the company should approve this project, and the commitment and
enthusiasm of the team to make it happen. You have to believe in the
project and show passion that you want it to happen.

A good tip is to structure your presentation from the top down, what do
you want as an outcome and then structure the presentation to support
and build to the obvious outcome.

6. Review Preliminary Justification with Key Stakeholders:
No one directly impacted by the numbers should be surprised by the
formal ROI presentation. If this happens during the presentation it will put
a cloud over the validity of the numbers and the project, so don’t risks a
disagreement with the numbers or assumptions; make sure you have the
support of all the stakeholders up front.

Don’t assume, for example, that if the analysis shows material costs can
be reduced by 5% as a side benefit to another project impacting
commodity purchases that the Director of Supply will buy into that number
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Justifications
Kotan Australia P/L
A.B.N 32 567 237 240

without a long dialog first.

7. Check, Check & Recheck the Numbers and Assumptions:
Simple mistakes in just one area can undermine the credibility of the
entire financial analysis. If a single number or spreadsheet error is not
caught, it can cause reviewers to consciously or unconsciously look at all
the other numbers with doubt. An error in an assumption or the basis of
the ROI calculations can be disastrous for the creditability for the both the
project and the presenter.

For example, if the analysis is based on a facility working a given number
of shifts and overtime, and it turns out that they operate differently, the
basis of the ROI calculations can be in serious question, causing the whole
effort to go back to the drawing board.

By remembering these 7 steps, and making sure that you have a “Good
Story” and “The Facts” any manager can maximize the chances that a good
project with strong financial returns will receive approval for funding and see
the project implemented.

For Further Assistance or Enquiries:
Contact: Paul Mracek JP Tel. +61 3 9532 5476
CPEng,GAICD,FAIM Mobile: +61 (0)418 885 122
Chief Executive Officer Email: pmracek@optusnet.com.au

otan Australia©
The Secret to Elegant & Simple solutions in Business

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Seven steps to improve cost justification

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