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

Quick reference

Creating a Business Case

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

When to use

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.

Instructions

Definition

Business Case: “A document that describes the necessary information from a business standpoint to determine whether or not the project is worth the required investment.” PMBOK® Guide

 

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. 

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 case 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, new sales, or cost to implement.  Normally detailed project planning has not been done yet, so these are just rough estimates – one or two significant digits.

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 funded or not.

 

This definition is taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute, Inc., 2013.

Hints & tips

  • A business case tells a story. Make sure your story is clear, not confusing.  It is an adventure story, not a mystery.
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  • 00:04 Hi, I'm Ray Sheen.
  • 00:06 I'd like to talk now about another aspect of project initiation,
  • 00:10 and that's the development or creation of a project business case.
  • 00:14 The Project Management Body of Knowledge, the PMBOK Guide, defines business case
  • 00:19 as a documented economic feasibility study used to establish validity
  • 00:24 of the benefits of a selected component lacking sufficient definition.
  • 00:28 And that is used as the basis for
  • 00:30 the authorization of further project management activities.
  • 00:34 The project business case is a financial rationale to explain whether or
  • 00:38 not we should do the project.
  • 00:41 Will this project make money or lose money?
  • 00:44 Normally the project business case is developed with a cross-functional team
  • 00:48 working together, so that the impacts in each department or
  • 00:51 function are then included in the analysis.
  • 00:54 The project business case describes the opportunity or
  • 00:58 need in financial terms by identifying the new revenue or the cost savings.
  • 01:03 It also describes the cost of doing projects in financial terms by
  • 01:07 creating a high level estimate of cost and time, not a detailed one.
  • 01:12 We haven't done a detailed project plan yet, so
  • 01:15 we won't have detailed estimates yet.
  • 01:17 I recommend a four step process to create the project business case.
  • 01:22 First, identify the need or opportunity.
  • 01:25 Once that is done, develop the options or possible projects for meeting that need.
  • 01:30 Now for each of the options estimate the cash flows.
  • 01:33 That means that you estimate the project costs and
  • 01:36 the project financial benefits over a period of time.
  • 01:39 Finally, determine the return on investment,
  • 01:42 the ROI, and make a recommendation as to which option the business should select.
  • 01:48 Let's look at each of these steps in more detail.
  • 01:51 The first two steps are the opportunity and options.
  • 01:54 This is the creative part of developing a project business case.
  • 01:59 Step 1 was to identify the business need or opportunity.
  • 02:03 This is normally done by the business unit with the benefits.
  • 02:06 By that I mean it is the department or function that is responsible for
  • 02:10 managing the benefits stream created by the project.
  • 02:14 So if it is a new product development project, it's often sales or
  • 02:17 marketing that identifies the opportunity.
  • 02:20 If it is a cost improvement project, it's often the operation that will have
  • 02:24 the lower cost that identifies the opportunity.
  • 02:27 Many times the opportunity is a result of strategic planning.
  • 02:30 The project is to implement a portion of the business strategy, such as a strategy
  • 02:35 to expand into new markets or to reposition the business product line.
  • 02:40 Sometimes the need or
  • 02:41 opportunity is a reaction to an issue in the business environment.
  • 02:45 The project may be needed because of a regulatory change, or an old technology
  • 02:50 may no longer be supported and the systems or products may need to be upgraded.
  • 02:55 And sometimes the need is based upon business performance gaps that have been
  • 02:59 identified through improvement processes or Lean Six Sigma.
  • 03:04 Once the opportunity is identified,
  • 03:06 the next step is to develop options that will address the need or opportunity.
  • 03:12 This activity is normally led by the function with the primary project effort,
  • 03:16 for systems projects it's IT, and for
  • 03:18 building projects it's facilities management.
  • 03:22 At this step, there's a lot of discussion to understand the project objectives,
  • 03:26 boundaries, and the assumptions.
  • 03:28 The people doing this step want to make sure that the project concepts that they
  • 03:32 propose and analyze are responsive to the need.
  • 03:35 Taking time at this step to clearly understand and
  • 03:38 communicate with the departments that identified the opportunity in step one
  • 03:42 will be of tremendous value in the project planning and execution processes.
  • 03:47 This step integrates with the classic project initiation and
  • 03:51 to some degree project planning activities.
  • 03:54 So do this step well, it's not just financial bureaucracy.
  • 03:57 The results are used as you move into more detail planning.
  • 04:01 Let's keep going.
  • 04:03 The next step is to create the estimate that we will use for the ROI analysis.
  • 04:08 We do this by estimating the relevant cash flows.
  • 04:11 That means we estimate the increase or sources of cash due to the project,
  • 04:16 and we estimate the decreases or uses of cash.
  • 04:19 It's important that we estimate all of the increases and
  • 04:23 decreases, and that we estimate them for
  • 04:25 the time period of both the project activities and the project benefits.
  • 04:30 What I mean by that is if the project is a product development project the estimate
  • 04:35 needs to include not only the project costs.
  • 04:38 But also how much sales and benefits will be realized from the project for
  • 04:41 the first several years after the product has been introduced to the market.
  • 04:46 Increases are due to increased sales or lower costs.
  • 04:50 Either way, the business has more money to work with.
  • 04:53 Again, in addition to the amount you need to estimate,
  • 04:56 you need to estimate when the benefit will start and how long it will last.
  • 05:00 Decreases are project costs and the implementation costs of the project.
  • 05:04 Don't forget to include any long term maintenance or
  • 05:07 operating costs that the business must pay for.
  • 05:11 This estimating is best done with a cross-functional team,
  • 05:14 to make sure that the financial impacts and
  • 05:16 all the business functions is correctly reflected in the financial estimates.
  • 05:21 Once the cash flow estimates are determined, they are entered into
  • 05:24 a spreadsheet and the return on investment or ROI is calculated.
  • 05:28 There are several dynamic return on investment techniques used for
  • 05:32 project business cases, each has advantages and disadvantages.
  • 05:36 Use the one that your business is most comfortable with.
  • 05:40 Once you have the numbers in the spreadsheet,
  • 05:42 the calculations are very straightforward.
  • 05:45 Finally, select the option that has the best return and make a recommendation.
  • 05:50 If recommending an option that doesn't have a great ROI,
  • 05:53 you should have a very good rationale and be prepared for some tough questions.
  • 05:58 A project business case is a great technique for
  • 06:01 communicating the financial impact of doing a project.
  • 06:04 It explains the opportunity, the project approach, the costs and
  • 06:08 benefits in the language of business, which is money.

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