Financial Modeling for Business Cases

Introduction

Especially in the early stages of a company’s life, evaluating potential investment opportunities is a crucial step on the road to success, because the likelihood and level of return on an investment can determine the future of the business. For this reason carry out this evaluation process, known as the business case, to ensure the highest standards.

A business case is a financial document used by company management to evaluate and compare different investment opportunities. Although business cases share some similarities with financial plans, the two documents are extremely different but equally valuable to the company’s operations.

And although business cases are very useful in the early stages, their importance increases with the size of the company. This is because larger companies may even have hundreds of different investments to choose from, so a standardised and easy-to-understand analysis can greatly speed up and simplify the process.

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Unique aspects of business cases

As we have said, while business cases have some similarities to financial models, they also have many unique features that make them extremely valuable for business management.

First of all, unlike a full-scale financial plan, business cases focus only on a specific investment. So instead of creating a complex and technical model for the entire company, the result is usually a clear and easy-to-understand analysis of the potential return and cost of each investment opportunity. Therefore, elements such as the financial statements are only secondary to the purpose of the business case and are often not taken into account.

Moreover, business cases are simpler in terms of financial complexity, as they often have to be presented to potential investors and managers who are not financial experts.

Therefore, the main objective of a business case is to clearly present the costs, the revenues, the time needed to generate the revenues and the overall value of the project. More specifically, the business case first presents the investment required and then calculates the benefits and presents them as a return over the given time period.

So when you prepare a business case, you must first identify and add up all the costs required for the project, including the initial investment, staff salaries and operating costs.

Then it is extremely important to identify all the different sources of return and decide how they will be measured. For example, return is often measured in a number of ways, such as: Cash return, increase in turnover, reduction in time spent on a particular activity, increase in efficiency or reduction in risk.

Finally, to adjust returns over time to the present value of the project, a parameter called the weighted average cost of capital (WACC) is used. The WACC varies from company to company and represents the cost to the company of providing funds to invest in the project.

So, if we use the WACC as a discount rate for the project’s future cash flows, we can compare them by investment size, net present value (NPV), initial rate of return (IRR) and other key performance indicators (KPIs).

My financial modeling process

When it comes to building a business case, I offer two different types of services, depending on the specific needs and requirements of the company I am working with.

The first service is usually chosen by companies that do not yet have a reporting and analysis structure for a project. In this case, the main objective of our collaboration is to build a solid foundation for any future business case analysis that your company may need to undertake. Along with building a basic structure, I also offer customised templates and optional coaching on how to use them and how to run the business case.

For more complex business cases, on the other hand, I take a more in-depth and precise approach, perfected after many years of financial modeling into this 7-step process that ensures a flawless and high-quality business case that simplifies even the most difficult investment opportunities and delivers understandable and insightful results.

My 7-step process includes:

This step is crucial and is carried out together with the client to identify all the key parameters which must be studied in the business case.

Because each project must be evaluated for the good of the company and not only for its individual return, it is important to define the business model and future goals of the company.

The third step consists in gathering useful data and determining the assumptions needed to make the model work.

To ensure that the final product matches my client’s expectations and to check that the structure is error-free, it is important to build an “alpha” version before the final business case is completed.

After the alpha version has been approved by the client, it is necessary to implement any changes, improve it and test it until a perfect result is achieved.

This step is optional and generally used for more complex business cases, and it requires building a sensitivity and scenario analysis of the business case. This step helps achieve a more comprehensive result taking in consideration various highly likely situations.

Finally, the last step is creating a report or a pitch that contains all relevant information in an easy-to-read format. This step is extremely useful when the business case needs to be presented to the investors or non-financial managers.

Related Analysis

As we briefly discussed in the sixth step of my financial modeling process, introducing a sensitivity or scenario analysis into a business case can provide extremely valuable insights, especially when a company is operating in an innovative niche or when general economic conditions are not stable.

So even if you decide to use basic business case templates, it is always advisable to supplement them with sensitivity or scenario analysis (or both) to ensure that even if something changes in the market or in the business, you are ready to act and either limit the damage or take advantage of a profitable opportunity

Sensitivity analysis looks at how the bottom line changes if a single parameter or assumption changes. For example, if an investment promises 30% energy savings, how would the NPV change if the savings drop to 20%?

Scenario analysis, on the other hand, looks at how the end result changes if several parameters or assumptions change at the same time. For example, how would the IRR of a project change if the sales volume increases but the price decreases?

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My Services

Reporting & approval process plus Business Case Template

  • Build a universal business case template tailormade to your company
  • Implement a databank for all projects
  • Setup the reporting & approval process
  • Implement Project Reporting to monitor how approved projects are performing

Support complex business cases

  • Video calls and exclusive support throughout the whole process
  • Coordinate with the team to collect relevant data and establishing assumptions
  • Deep level of details and a wide range of KPIs
  • Organised and professional presentation of the final results as a member of the team

Related Resources

Link: Creating a Business Case: Understanding, Components, and Tips
Other Blog Posts