A couple of months back I blogged about business plans (Want to be a Shark?). Today the topic is the business plan’s under-appreciated and much maligned stepbrother, the business case. Most everyone loves business plans; few love or even like business cases.
Unlike a business plan, which most commonly is used externally, to raise money or the like, a business case is typically an internal document. No fancy fonts, no photo-shoots, and often few words–just numbers in a spreadsheet–the business plan provides answer to what if questions like: “If I invest in progressive tooling for product XYZ what will my return on that investment be?” Also unlike their ritzy stepbrother, a business case is often a working class document or more often, a spreadsheet.
Or should be. In practice, business cases are often misunderstood, feared and hence vilified. The reason is easy to understand–a properly done business case cuts through the hype and sound bytes, bypasses career building and corner office seeking, and focuses on three word: Return On Investment or ROI (actually the right metric is typically IRR, Internal Rate of Return, but that’s for the advanced version of this blog…). A business case, if properly done, can account for risk, time value of money, and many intangibles. To do this, an expected value approach is needed, where an outcome’s financial outcome–be it a gain or a loss–is multiplied by the probability that said outcome will be achieved. Care must be taken to spell out which risks are factored in so that viewers of the information neither double count nor neglect this risk when evaluating the outcome versus some mental or corporate “hurdle”–the threshold rate of return.
Building a proper business case takes a fair amount of rigor as well as the ability to properly deal with P&L, cash flow, and balance sheet issue. Properly accounting for “salvage” value is also critical, although again beyond the scope of this blog. But once built, a business case is a valuable tool for making business decisions.