Locked lesson.

Upgrade

About this lesson

The business case provides the business rationale, normally in financial terms, of why a project should be done.

Exercise files

Download this lesson’s related exercise files.

Developing a Business Case .docx
60 KB Developing a Business Case - Solution.docx
60.2 KB

Quick reference

Developing a Business Case

The business case provides the business rationale, normally in financial terms, of why a project should be done.

 

When to Use Business Cases

A business case is normally used in one of two contexts.  The first is when the business is determining how to allocate resources on projects.  The business case of each project is reviewed to determine which projects provide the best return on investment.  The other time the business case is used is when a business is seeking to fund a project using external funds (from outside investors or from funding sources such as parent companies or customers).  The business case provides the financial justification for why someone would want to fund the project.  Many businesses will require a business case for a project for that project to be included in the annual OpPlan.

Instructions

Build your business case using this four step process.

Step 1: Identify the business need or opportunity.

This step is usually done by the business unit who is the primary beneficiary from the project.  Typically the need or opportunity is either an element of the business strategy or is driven by a problem or issue within the business.  The need should include some type of financial benefit.

Step 2: Develop option(s) to meet the need.

This step is usually done by the organization or organizations that will conduct the majority of the project work.  For instance on a new product development project, step 1 may have been completed by marketing or product management, but step 2 will be completed by research and development or engineering.  At least one high level option is identified.  Multiple options may be identified.  If so, steps 3 and 4 will be done for each option and presented to the stakeholders along with the risk of each option for them to make a decision between options.  This step is often integrated with elements of project initiation and planning. 

Step 3: Estimate relevant cash flows.

Estimate all the project costs or expenses for each option.  Estimate the types of financial benefits for each option, such as cost savings or new sales.  Normally detailed project planning has not been done yet, so these are just rough estimates – one or two significant digits.  These estimates typically are made for multiple years.

Step 4: Determine ROI and make a recommendation

Use the organization’s preferred Return on Investment (ROI) technique, such as breakeven, payback, NPV or IRR.  Based upon the ROI calculation, make a recommendation as to whether project should be approved and funded or not. 

 

Hints and Tips

  • The estimated cash flows only need to be rough numbers, not detailed estimates.
  • The project estimated cash flows need to be spread across the number of years that are planned for the project duration.
  • The benefit cash flows need to be spread across the number of years that the business will receive benefit.  It is common for the benefit cash flows to change annually based upon forecasted sales or cost savings opportunities.
  • The ROI techniques will be discussed in more detail in another module.  However all of the techniques will need the same basic information – project costs and benefits allocated by year.
Login to download
  • 00:03 Hello, I'm Ray Sheen.
  • 00:05 I'd like to talk with you about building a business case.
  • 00:09 This is the way a company provides the financial justification for
  • 00:12 doing a project.
  • 00:14 Let's start off with the formal definition of a business case.
  • 00:18 It is the document that describes the necessary information from a business
  • 00:22 standpoint.
  • 00:23 To determine whether or not the project is worth the required investment.
  • 00:28 The project business case provides a financial rationale to explain whether or
  • 00:31 not we should do the project.
  • 00:33 Will this project make money or lose money?
  • 00:36 Normally, the project business case is developed with a cross-functional team
  • 00:40 working together, so that the impact in each department or
  • 00:43 function is included in the analysis.
  • 00:45 The project business case describes the opportunity or need in financial terms
  • 00:50 by identifying the new revenue or cost savings that is created by the project.
  • 00:55 It also describes the cost of doing the project in financial terms.
  • 00:58 By creating a high level estimate of the cost and time, not a detailed one.
  • 01:03 A detailed project plan won't be done unless the project is approved, so
  • 01:07 detailed estimates have not yet been created.
  • 01:11 I recommend a four step process to create the project business case.
  • 01:15 First, identify the business need or opportunity.
  • 01:19 Once that is done, develop at least one option, and often more, for
  • 01:22 meeting that need.
  • 01:23 Now, for each of the options,
  • 01:25 create a high level estimate of the project cash flow.
  • 01:28 That means that you estimate the project costs and project benefits
  • 01:32 over a period of time, usually out for several years past the project completion.
  • 01:37 Finally, determine the return on investment, the ROI, and
  • 01:40 make a recommendation as to which option the business should select.
  • 01:44 Let's look at each of these steps in more detail..
  • 01:48 The first two steps are the opportunity and options.
  • 01:51 That is the creative part of developing a project business case.
  • 01:54 Step one was to identify the business need or opportunity.
  • 01:58 This is normally done by the business unit with the benefits.
  • 02:01 By that I mean, it is the department or function that is responsible for
  • 02:05 managing the benefit stream created by the project.
  • 02:08 So if it's a new product development project, it's often sales or
  • 02:12 marketing that identifies the opportunity.
  • 02:14 If it is a cost improvement project, it is often the operation that will have
  • 02:18 lower costs that identifies the opportunity.
  • 02:21 Sometimes the opportunity is a result of strategic planning.
  • 02:25 The project is to implement a portion of the business strategy, such as
  • 02:29 a strategy to expand into new markets or to reposition the business product lines.
  • 02:34 Sometimes the need or opportunity is a reaction to an issue in the business.
  • 02:38 The project may be needed because of a regulatory change or an old technology may
  • 02:42 no longer be supported and the systems or products may need to be upgraded.
  • 02:46 And sometimes the need is based upon business performance gaps that
  • 02:50 have been identified through improvement processes such as Lean or Six Sigma.
  • 02:54 Once the opportunity is identified,
  • 02:56 the next step is to develop the options that will address the need or opportunity.
  • 03:00 This activity is normally done by the function with the primary project effort.
  • 03:04 Systems projects, it is IT.
  • 03:06 And development projects, it is engineering.
  • 03:09 At this step there is a lot of discussion to understand the project objectives,
  • 03:12 boundaries and the assumptions.
  • 03:14 The people doing this step want to make sure that the project concept they propose
  • 03:18 and their analysis is responsive to the need.
  • 03:21 Taking time at this step to clearly understand and
  • 03:24 communicate with the department and identify the opportunity in step one
  • 03:28 will be of tremendous value in the project planning and execution processes.
  • 03:32 This step integrates with the classic project initiation and
  • 03:35 to some degree project planning activities.
  • 03:37 So do this step well.
  • 03:39 It is not just financial bureaucracy,
  • 03:41 the results will be used to guide more detailed planning.
  • 03:44 The next step is to create the estimates that are used for ROI analysis.
  • 03:48 We do this by estimating the relevant cash flows.
  • 03:51 That means we estimate the increase or sources of cash due to the project.
  • 03:56 And we estimate the decreases, or uses of cash.
  • 04:00 It is important that we estimate all the increases of decreases, and
  • 04:03 that we estimate them for the time periods of both the project activities, and
  • 04:07 the duration of the project benefit.
  • 04:09 What I mean by that is, if the project is a product development project,
  • 04:13 the estimate needs to include the sales and
  • 04:15 profits that will be realized from the product for
  • 04:18 the first several years after the product has been introduced to the market.
  • 04:23 Increases in cash are due to increases in sales or lower costs.
  • 04:27 Either way, the business has more money to work with.
  • 04:30 Again, in addition to an amount,
  • 04:31 you need to estimate when the benefits will start and how long it will last.
  • 04:35 Decreases are the project costs and the implementation costs of the project.
  • 04:40 Don't forget to include any new long term maintenance or
  • 04:43 operating costs that the business must now pay for.
  • 04:47 These estimates are best created with a cross-functional team to make
  • 04:49 sure that the financial impact in all of the business functions
  • 04:53 is correctly reflected in the financial estimates.
  • 04:56 Once the cash flow estimates are determined, they are entered
  • 04:59 into a spreadsheet and the return on investment or ROI is calculated.
  • 05:03 There are several dynamic return on investment techniques used for
  • 05:06 project business cases.
  • 05:08 Each has advantages and disadvantages.
  • 05:10 Use the one your business is most comfortable with.
  • 05:13 Once you have the numbers in the spreadsheet,
  • 05:14 the calculations are all very straight forward.
  • 05:18 Finally, select the option that has the best return and make your recommendation.
  • 05:23 If recommending an option that does not have a good ROI,
  • 05:25 you should have a strong rationale, and be prepared for some very tough questions.
  • 05:30 Project business case is a great technique for
  • 05:33 communicating the financial impact of a project.
  • 05:36 It explains the opportunity, the project approach, the cost and benefits of
  • 05:41 the project; and all of that in the language of business, which is money.

Lesson notes are only available for subscribers.

PMI, PMP, CAPM and PMBOK are registered marks of the Project Management Institute, Inc.

Gift this course