One of the many tasks business analysts are inevitably called on to do is create a business case. As defined by the Business Analysis Body of Knowledge, a business case justifies the investment required to deliver a proposed solution.
A business case is part of the due diligence process. By measuring the benefits, costs and risks associated with the investment being made in a particular project or product, it assesses and evaluates the options available to solve the business issue.
The business case provides an opportunity for the business to determine whether a project is needed and the solution options are beneficial to the organization. This is accomplished through both qualitative (SWOT or ““Strengths, Weaknesses, Opportunities and Threats”) and quantitative (financia) analysis techniques, and describes whether the solution is feasible, and whether the investment in the solution meets business goals and objectives and is financially viable, something all businesses find of huge value.
The business case is more than just financial justification. It includes:
- Why the project should be undertaken and includes a problem statement.
- How will the business issue be solved.
- Recommended solutions.
- What are the benefits to the organization, customer, and staff.
- How much money, resources and time will be needed to deliver the solution.
- Risk, assumptions and constraints.
- Financial impact.
Some financial terms you may wish to know as you create your business case:
- Revenue: Income from the organization.
- Expenses: Costs associated with organizational operations, research and development, and marketing (e.g., direct expenses, operating expenses).
- Cost-Benefit Analysis: The benefits of a particular solution are monetarily quantified, and the costs associated with the solution (people, process, marketing, technology) are subtracted to give a basic CBA. Depending on the organization, put a dollar value on intangible items, such as risk (e.g., damage to the organization’s brand).
- Opportunity Costs: This is the cost of choosing one investment (solution) over another (e.g., choosing an investment in X over an investment in Y. If investment X is 5 percent and investment Y is 10 percent, your opportunity cost is 5 percent). Because at this point we don’t know what the outcome will be, we must assess risk and possible outcomes to determine estimated opportunity costs.
- Cash Flow: Revenue in, expenses out over a period of time.
- Discounted Cash Flow: Reflects the value of money over time, taking into consideration interest rates and inflation. For example, $1 today may only be worth 98 cents in a few years.
- Internal Rate of Return: Evaluates whether an investment is desirable when it’s compared to others. For example, let’s say there’s a solution that has a cash flow over three years that nets an IRR of 3,000. Another solution has a cash flow of 5,000. The higher number represents the better investment.
- Net Present Value: The difference between the present value of cash inflows and the present value of cash outflows. A positive NPV indicates a good investment. Most companies have a desired NPV established, and that’s the value that should be achieved for a business case to be accepted. If the NPV is negative, then the suggested solution should be rejected.
- Payback Period: The length of time it takes for the solution’s costs to be recovered. For example, If I pay $20,000 for solar power, and I save $1,000 in electricity per year, then the payback period will be 20 years. The shorter the payback period, the better the investment.
Finally, the information provided by the financial analysis should answer the following questions:
- Is the solution affordable?
- Will the solution pay for itself over a reasonable amount of time?
- Does the solution give us the most out of our investment?
- Does it meet business goals and objectives?
- Is the project feasible?
Although you may not be actively working on a business case right now, the approach and thought processes required to write one will be helpful throughout your business analysis process for a simple reason: They’ll help you prioritize each project’s requirements.