Numbers Alone Do Not Make the Case Does the business case meet the needs of decision makers and planners? Numbers alone do not make the case: it's what you do with them that counts. A major part of the answer lies with the financial metrics you choose.
When the accountant sets out to produce this year's income statement, we know ahead of time what to look for: Sales revenues, gross margin, extraordinary expenses, and net income, for instance. The categories are already there; we just want to see the numbers. When the business case analyst sets out to answer the question: "Is this a good business decision?" we're not quite so sure what to expect: Projected income? Cash flow? NPV? ROI? Total cost of ownership? Participants in our business case seminars often ask: "Which of these has to be there in order to "make" the case?" It's Not in the Books The answer is not in the business school textbooks. Some business people think all these questions were settled long ago by financial specialists. They have not been settled. Some even think there are universal standards and guidelines for cost benefit analysis (just as American accountants have the GAAP managed by the FASB, for instance). There is nothing comparable for the business case. If your organization has not already established its own local business case standards, you're on your own. Everyone wants to see "the numbers," but which numbers do you deliver? Bring in the Stakeholders Like most important steps in case design, the choice of financial metrics should involve the stakeholders, or business case "users" as well as the case builder (for more on stakeholder involvement in the business case, see our whitepaper "The IT Business Case: Keys to Accuracy and Credibility". It should go without saying: If you and your stakeholders agree before case building starts on what information they need and to what level of certainty, there's a good chance you can deliver. In terms of financial metrics for the case, here are a few options: * Net cash flow. * Cumulative cash flow * Payback period * Income * Total cost of ownership * Total capital costs * Total operating expenses * Discounted cash flow (DCF) and net present value (NPV) * Internal Rate of Return (IRR) * Return on investment (ROI): * Simple ROI * Average rate of return * Return on capital employed (ROCE) * Return on equity (ROE) * Return on assets (ROA) * ...and other "ROI" measures * "Cost per" metrics: * Cost per transaction * Cost per employee * Cost per site * ...and so on The list of possibilities could go on. Which of these do you point to when you make recommendations and conclusions? There are a lot to choose from. Financial Metrics Pro for a complete introduction to more than 100 financial metrics. And, the plot thickens: Other things being equal, the option with the higher NPV is the better choice. But in the real world other things are never equal. Sometimes the metrics seem to carry contracting messages: Option A may lead to an ROI of 150% while option B expects a 40% ROI. But A's NPV is $1,500,000 while B's is $2,000,000. Which is the better investment? The numbers alone will not tell you. Can We Agree? You and your stakeholders may or may not have given much thought to which metrics, specifically, will enable them to meet decision making or planning needs. This knowledge is critical, however, to ensure that you collect enough data of the right kind, produce analyses that have practical value for your stakeholders, and then useful recommendations and conclusions. These three steps will help solve the metrics problem before it arises: * First, learn (if you don't know already) what each metric above tells you about a cash flow stream or body of financial numbers. * Second, meet your stake holders before building the case for the purpose of agreeing on: * The purpose of the case: Who is going to make what decisions when, based on what information? * Business objectives for the subject of the case: What will the proposed action do for us? * How to compare competing proposals, if there are any. Which metrics compare different proposals fairly? * What history teaches. How were similar business case decisions made in the past? Were those decisions regarded as successful? What needs to change. * Priorities, problems and limitations. Is there a cash flow problem? Do we need to cut costs or improve productivity in certain areas? * Third, based on the discussion, propose and agree with your stakeholders on the several most important metrics for the case. That way they will know what to expect, and you will know what to build into the case. Marty Schmidt 6 April 2009 --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kantakji Group" group. To post to this group, send email to [email protected] To unsubscribe from this group لفك الاشتراك من المجموعة أرسل للعنوان التالي رسالة فارغة, send email to [email protected] For more options, visit this group at http://groups.google.com/group/kantakjigroup?hl=en سياسة النشر في المجموعة: - ترك ما عارض أهل السنة والجماعة. - الاكتفاء بأمور ذات علاقة بالاقتصاد الإسلامي وعلومه ولو بالشيء البسيط. ويستثنى من هذا مايتعلق بالشأن العام على مستوى الأمة كحدث غزة مثلا. - عدم ذكر ما يتعلق بشخص طبيعي أو اعتباري بعينه. باستثناء الأمر العام الذي يهم عامة المسلمين. - تمرير بعض الأشياء الخفيفة المسلية ضمن قواعد الأدب وخاصة منها التي تأتي من أعضاء لا يشاركون عادة، والقصد من ذلك تشجيعهم على التفاعل الإيجابي. - ترك المديح الشخصي. -~----------~----~----~----~------~----~------~--~---
