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So we need to perform a feasibility study of one of our initiatives and need to present it to the 'higher ups' - It needs to incorporate numbers (estimates) both from the perspective of tangibles and intangibles. I'm pretty good with the intangibles but what I'd like to know is what to include in a typical software business case from an 'economics' perspective.

I know I'll show the ROI/IRR (Internal Rate of Return). But I want to know what dimensions of various 'economic' aspects should I also focus on? What are typically the dimensions on which one would base such a feasibility study?

I'm looking for a 'complete' example so to speak - I mean it could be with just headings of what to consider but I'm NOT looking for templates. We are going to be preparing it in Excel to help with the numeric calculations.

My question is then this: When making a business case what economic drivers should we consider? E.g., cash flow instances/streams are one but what else? (Drivers that directly impact the (predicted) bottom line would also be appreciated e.g., expect market share increase etc.)

I'm basically trying to understand what 'quantifiable' aspects to include in the business case...yes I'm also discussing this internally but wanted to the views of the community too :)

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The two main measures that I have used in the past are Internal Rate of Return and Cash Flow forecasts, both using discounted future values and in absolute terms. There's nothing too novel about these and I guess that you will have models for whatever your company requires.

In calculating the benefits, you might consider some or any of the following, depending on your industry sector:

  • Increased sales;
  • Reduced costs;
  • Shorter time to market (hence higher market share / competitive advantage. Probably hard to evaluate, but not impossible)
  • Reduced stockholding (maybe not relevant for your business)
  • Higher stock turnover ratio (also perhaps not relevant)
  • Increased efficiency therefore capacity to grow your output without additional staff. The other side of this is the ability to maintain the same level of sales with lower staff levels
  • Reduced training requirements
  • Opportunity to increase prices and thus margin, if functionality is increased
  • Lower maintenance costs through better quality
  • Ability to attract additional customers

A further consideration is that some would say that there is no such thing as an intangible benefit: only tangible ones that have not yet been properly evaluated. I'm not sure that I agree with this, but an example that has been quoted to me goes like this:

One benefit that is claimed is the increased publicity that will come about through a successful project. This provides high visibility and reputational benefits for the company. This is, on the face of it, intangible, but it can be made tangible by asking the managing director / chief executive how much he or she would be prepared to pay to a PR company to get this level of exposure. That is then the value of the tangible benefit that can be claimed.

A further reason for intangibles is that they are too inexact or too vague to put a value on. Using the example above, it is perhaps the case that the CEO would be unable to place a value on the publicity - but he may be happy to say that he would pay between $500 and $10,000 for it. Use a high / low range and do the calculations based on both, to give a range of benefits. The likely outcome will be somewhere between the extremes.

  • Good coverage! Do you have an idea where one could get some samples especially in excel, just to get a feel of the 'look and feel' of it? These are good points and worth including but just wondering if I could save the effort of reinventing the wheel... – PhD Oct 26 '11 at 6:00
  • Unfortunately I don't have any good excel examples that I can pass on, as the company that I used to work for had a strict policy that no documentation should be taken away without good business reasons. However, if you email me off-line (my email address is on my profile) I will be happy to try to help. – Iain9688 Oct 26 '11 at 18:08
  • Couldn't find your email id on your profile :( You could email your emailid to me - mine shows up on my profile though – PhD Oct 26 '11 at 18:58
  • Interesting... I can't see yours either. OK - use iain.millar@praefectusconsulting.co.uk – Iain9688 Oct 26 '11 at 19:24
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Include indicators of economic activity that directly affect your business (e.g. forecasts on auto sales if you are in the auto sector) as well as indicators that are proxies for economic activity that affects your business (e.g. forecast on new home prices if you are in the home remodeling business).

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You may like to consider, for initial year and subsequent ones

  • Gross Margin
  • Cost Reductions
  • Capital Investment
  • Costs
  • Working Capital Impact
  • Cost Avoidance

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