If you have ever launched a product or a business, you must have come across the term ‘business case’ at some point. When someone comes up with a business idea, they are often asked questions like “have you got a business case?” or “Is there a business case for this?” or something to that effect. Some people even use other terminologies like Return on Investment (ROI), cost-benefit analysis, business impact, etc. Irrespective of how the question is asked or what terminology is used, the key is to understand what a business case really is and what approach to use if you need to create one.
A business case is a justification required by investors to decide whether they should invest their money into a business idea or not. Typically, a business case shows revenues, costs, profits, payback period and other financial metrics to provide a financial assessment for an investment. But depending on the which part of an organisation you work in, you may approach business cases in a variety of different ways.
If you are preparing a business case for a project or programme, your business case could include things like timescales, risks and sensitivity analyses in addition to the typical financial parameters. It may also be a word document together with an embedded spreadsheet.
If you are looking at a business case from a product management or marketing perspective, you may focus more on the revenue side of things along with other financial metrics like NPV, IRR, and payback period, etc. From a format perspective, it can usually be a spreadsheet embedded into a slide-deck.
To sum up, a business case is a justification for doing anything that requires you to make an investment either in the form of money, your time or any other thing of value. So essentially, it is a case where you compare your investment with the projected benefits.
In this article, we will be looking at business cases mainly from a product management viewpoint. In product management, the business case is one of the most important documents required when we start investigating a new business idea. An interesting fact about business cases is that you don’t create them as a one-off thing, but you develop and refine them over time as your product develops. When someone comes up with a new business idea, a high-level business case can be created based on the understanding of the business at the time. As the idea moves from concept phase to the launch phase, the business case keeps getting updated also.
Top-down vs bottom-up
In an ideal world, we usually look for solutions when we encounter a problem. In the business world, things don’t always follow this natural path. There are cases when a product idea can come straight from a member of your senior leadership team. Ideas like those, sometimes, can come in the form of a pre-determined solution as opposed to a customer problem. What you need then is to find a way to justify that idea by linking that solution to a customer problem. That requires more of a bottom-up approach which is hard because you are in a situation where you have all the finer details of the solution, but you don’t fully know the problem.
The best thing to do in such situations is to talk to the solution vendor or whoever is the expert of that solution in your organisation so that the customer problem can be understood. That way, you are in a better position to establish the potential benefits of the solution. The other case is when you know a customer problem, but you are not entirely clear on the solution. That is more of a top-down case where you may have a good understanding of who your customers are and what problems they are facing. You may also have access to the information from your sales team to help you estimate the market size and even price-points. The risk, however, is that you may be too close to the problem, so the discussions with your sales team and possibly customers may lead you to either:
- Overestimate the customer problem and benefits – OR-
- Underestimate the complexity of the solution and hence the associated costs
The best way to mitigate that risk is to get the basics right. Start with a high-level business case capturing the overall problem and the potential solution(s). You can then refine it over time as more information becomes available.
Who is the audience?
The audience of the business case will be those who are sponsoring your product. If you work in a mid-sized or large organisation, you may have a wider group of people who must say “yes” before you can get the investment. In most organisations, there is a well-defined governance process that dictates how the decisions will be made. Generally, the business owner, e.g. a product manager or someone in a similar position presents a product idea to a governance board. This board comprises senior managers from various areas of the business such as finance, product management, marketing, engineering, sales, legal etc. If the members of the board are happy with the idea and the business case, the business idea may get approved. The finance department is the key for any business case, and the sooner you get them on board, the better.
How to create a business case?
A business case, for a new product or business, can be created in a spreadsheet. Depending on your audience, you may decide to provide of summary of that business case on a slide when you take your idea to the governance board. The business case is usually initiated by the product or business owner. The finance department is the most relevant stakeholder for your business case as they are the ones who you need to convince on the financials. Not all organisations work in the same way, so your finance department may be more or less involved in the creation of the business case, but they should be the ones to approve your business case when they are happy with it. Some organisations also have their own templates to help you create the financial analysis in a certain way.
Business cases can be created in multiple iterations where the latest iterations are expected to be the most accurate. These iterations can be aligned with your product development process. Let’s assume that your company has a product development process that looks something like the one below. In a process like that, you may create the first draft of your business case at the “Idea” phase, and then keep updating at each of the next phases. By the time you reach the “Build & Test” phase, your business case may already have all the necessary information so you may decide to call that the final version of your business case. After your product launch, you can use the final version of the business case to measure your product performance.
There is no hard and fast rule for a business case to follow a specific structure; however, generally, all business cases have a “summary” page or tab that summarises the financial assessment. There can also be other tabs or sections that show all the assumptions and calculations. It is a good idea for a business case to cover the following:
- Revenues – The money coming in. This consists of all the money that you earn from your products or services.
- Direct costs – The costs that are solely related to the production of your products or services. For example, if you are selling an online subscription for £5 per month to your customers and you pay £3 per month back to the supplier of this subscription, then this £3 per month will be your direct cost. If there are any other cost items directly or wholly related to the creation of this £5 subscription, then you will need to add those to the direct costs also.
- Operational expenditures (OPEX) – The costs for the usual business operations that include maintenance, support, and any other recurring activities.
- EBITDA, short for Earnings Before Interest, Tax, Depreciation and Amortisation. It is a measure of the operational performance of your business which is calculated by deducting all the operational costs (including direct costs) from the revenues.
- Capital expenditures (CAPEX) – All the costs of purchasing or upgrading any assets such as network components. When you build something, e.g. software to run your business, the development cost can be capitalised so it can be CAPEX.
- FCF, short for Free Cash Flow. It is a measure of the financial performance of a company which is calculated by deducting the capital expenditures (CAPEX) from the operating cash flow.
- Payback period: The time it takes in years to recover the money you initially invest in building your product. So logically, the sooner you break even, the better.
- Net Present Value (NPV) – It is a profitability measure of an investment which takes into account the present value of future returns from an investment, less the actual investment. In plain English, what you want to see is a positive number, and the higher, the better.
- Internal Rate of Return or IRR. It is a profitability measure of an investment which identifies the interest rate required to make the total returns equal the total costs and hence bringing the NPV to zero. Again, the higher, the better.
Business case example
Just to bring all this explanation to life, let’s take an example and create a business case in Excel. Let’s assume we are building a product called Commsbrief Network Performance Monitor abbreviated as CNPM. Let’s say we want this product to measure the performance of mobile services like voice calls, SMS, instant messaging, video calls, video streaming etc. through a special app that runs on mobile phones. This app collects mobile network performance information, compares with the industry standards for any given country, and sends a daily report to mobile operators who are the customers. Now, at this early stage, we only have this high-level idea and no details, so we need to make assumptions. We will create the first draft of the business case at this “Idea” phase and keep refining as the project goes on.
The first thing you need to do is to think about how the money will come in (your revenues) and how the money will go out (your costs). For revenues, you can think about the number of customers you expect, the prices you can realistically charge, etc. For costs, you can think about all the tasks you need to address in order to build, test, run and maintain your product. Once you have given it some thought, you can put it down on a piece of paper. For our example product CNPM, based on our expected business model, we will use the following assumptions and put them down on a tab in a spreadsheet.
We start the calculations with ‘year 0’ when we make the investment and build the product. You may build and launch in the same year, but in our example, we are building in year 0 and launching in year 1.
Now we calculate our volumes and revenues for year 1 using the assumptions above.
We then calculate the annual recurring costs that we need to budget for in order to keep our software app fully updated.
The projected volumes and revenues for year 1 can be organised in a table as shown below. We calculate the volumes and revenues for the following years by applying a 10% growth rate based on our assumption above.
Now that we have all the information, we create a summary tab in our spreadsheet to summarise the results as shown below. As the development of this product progresses, we can continuously update the business case to gradually minimise our dependency on the assumptions.
That’s it for now. If you need any tips regarding business cases, feel free to get in touch with us on firstname.lastname@example.org.Follow us...