Years ago, a colleague of mine presented a project he was passionate about for budget approval. It was rejected.
The colleague felt they had done their due diligence and research and built a compelling case for funding, but in fact, they only completed half the work to get financing approval.
Most maintenance and engineering managers are not well-equipped to make financial business cases to secure the appropriate capital expenditures from leadership. These managers might be perfectly qualified for their positions and roles related to facility maintenance and engineering, but few of them come prepared with the financial intelligence to make a foolproof business case.
When I refer to financial intelligence, I don’t mean intellectual smarts but rather monetary understanding. No leadership team will approve budgeting for a proposal without a solid business case supported by a solid return on investment (ROI).
The basic elements of a rock-solid business case start with a short executive summary of the proposal. Keep it short. Introduce the project and the reason for embarking on it. Summarize the requirements for successfully executing the project. This step should take a reader three to five minutes to read and should provide all the information they need to understand the proposed project and its requirements.
The next step is to explain the vision and strategic objective of the project. The vision should describe in one sentence the intended benefits of the proposed project, while the strategic objective should describe the way the project contributes to the overall strategic plans of the organization.
Next comes the actual business case. This purpose of the proposal should address the way the proposal will resolve the objectives. Remember, the business case is a tool for promoting and ensuring that an investment is justified in terms of the strategic direction of the organization and the benefits the project will deliver. It evaluates the benefits, costs and risks of alternative options and provides a rationale for the proposed solution.
I like to start with the assumptions and constraints. Getting the beliefs and restrictions out of the way allows readers to understand the expectations and the limitations. In this section, managers can propose the initial expected funding, technical support, outside resource requirements, special needs, and a timeline.
Next comes the economic and business evidence for the proposal. Provide confirmation of the benefit of the project. Justify the project in terms of the business and economic background, and describe the way the current solution meets the facility needs. Detail the gap between service goals and what the current solution achieves.
Provide alternative solutions. Managers don’t always get what they want, but something is better than nothing. Provide alternative options other than the proposed solution. In business cases, one option might be to maintain the status quo. For each option, managers should provide the following information:
Stakeholder impact. For some criteria, no numeric evaluation exists, such as cost or time. For each option, try to assign a scaled number to indicate the level of impact for each stakeholder, and then total the ratings. To do this, all stakeholders must be identified.
I like to use a matrix to organize my options and lay out on one page all the alternatives, benefits, disadvantages, costs, risks and stakeholder impacts. Create a matrix for each option, then summarize for each option with the greatest return at the lowest risk. From the analysis, the recommended option is presented. Describe the preferred option derived from the analysis with the preferred choice.
It’s important that managers understand that this process should be treated and viewed as a project. As such, they need to establish an implementation plan and include a timeline with milestones, completion dates, resources and when funding will be required. As with any project, a risk assessment should be developed and managed. A risk matrix can be used to identify and manage risk.
No business case is complete without financial support. When managers prepare a business case, they must create a financial justification using a cost-benefit analysis, which is usually a study on the expected qualitative and financial benefits of the project or alternative options.
A cost-benefit analysis is an economic evaluation of investment alternatives and project options with respect to their potential ROI. Besides forecasting financing and benefits over a defined timeframe, a cost-benefit analysis usually involves several assumptions that can be used for comparison. Discounting cash flows, determining the amortization time and calculating return rates are the most common approaches for calculating the cost-benefit analysis.
Managers can use several common analysis tools to support the business case:
Here is a six-step process for a cost-benefit analysis:
1. Define the scope.
2. Define the assumptions.
3. Determine the qualitative advantages to the proposal.
4. Develop a forecast of the required funding and milestones.
5. Choose the cost-benefit tool to use, such as NPV, ROI and IRR.
6. Calculate the value derived from the proposal.
Considerable overlap exists between the business case and the financial analysis. As with any financial models and analysis, there will always be a perception of reality, and forecasts might or might not be met in reality. Therefore, all the methods described here rely on assumptions. Importantly, managers need to be consistent with the business case and financial justification.
I strongly recommend that prior to presenting any financial data to decision makers, managers first confirm and validate the numbers with the finance department. When someone presented me with financial requests, the first person I spoke with was my chief financial officer.
A proper business case usually requires a financial cost-benefit analysis. While several financial analysis methods can help managers compare and evaluate different options, managers should be aware of the risks and weaknesses of each one. Make sure to understand these dependencies, work with different alternatives, and maintain a comprehensive and honest communication with the stakeholders.
Follow these guidelines, and the project or proposal will be foolproof.
