Prioritize Based Efforts on Business Case

Introduction

Companies spend money and other resources to get what they want.  Expenditure is a good thing when the value a company receives exceeds what it spent to obtain it. 

But companies often face difficulty setting up filters for expenditure—authorizing high-value expenditure and preventing low-value expenditure.  Too often companies either open the floodgates allowing low-value spends or clamp down strict spending controls preventing high-value spend.

Companies applying Standard Growth Model best practice tie expenditure to approved business cases. Organizations frequently lack sound business case process.  

What is a Business Case?

A business case concerns cash outflows and cash inflows. That's it. Someone who wants to spend company money writes a business case by describing what cash will be spent, what cash will come in as direct result of the spend, and when each will happen. Here's most of a business case:

Year	2026	2027	2028	2029	2030	2031
Cash Flow	-$10,000.00	-$100,000.00	$34,000.00	$90,000.00	$175,000.00	$100,000.00

Evaluating the value of those cash ins and outs (IRR)

Once we have cash outflows and inflows we need a simple number to characterize them--the Internal Rate of Return (IRR). We don't just sum over the "Net Cash Flow" line to determine which business cases are best because:

1. Money now is more valuable than money later
2. All spends imply opportunity cost

So finance professionals invented the IRR to make later promised cash inflows less valuable than earlier promised cash inflows. A higher IRR is better than a lower IRR.

Discount Rate and Net Present Value

Technically, IRR is based on discount rate. Discount rate percent return a business believes it should achieve on any cash it invests. It represents the opportunity cost of spending money on this project rather than something else. If you discount each year's cash flow by a little more each year, you can calculate the Net Present Value (NPV) of this project. But we recommend using IRR instead of NPV because:

1. Calculating NPV requires a business to decide its own discount rate
2. That decision will involve time, effort, and disagreement and
3. IRR doesn't require us to calculate discount rate because it tells us the discount rate of each project would imply if it were a break-even project (an NPV of zero)

We Have Business Cases; Now What?

1. Determine what expenditure is operationally necessary, can't be captured in a business case, and won't go through the competitive business case process
2. Stack all remaining efforts by IRR and fund the highest
3. Look back to determine the cash inflows of previously funded efforts against their forecasts
4. Don't get distracted

Determine operationally necessary spend

Depending on how you structure your business, certain functions will not fit well in the business case process. For example, certain compliance functions, in-house legal teams, and facilities staff might not be able to justify their existence by reference to revenues alone. It is OK to fund them by excluding from business case process as long as:

1. Each is subject to a separate process seeking efficiency
2. You're sure there's no direct tie between each and revenues. For example, a company that has a single facility and multiple lines of business might not be able to connect each facility worker to revenue. But a facility that serves a single currently unprofitable line of business may be best dealt with through the business case process.

Stack all efforts by IRR and fund the highest

It's pretty simple. Once you do the hard work of requiring sane business cases and stamp out the natural gamesmanship, just fund what looks like it has the best returns.

Look back and determine cash inflows of previously funded efforts

As part of the forward-looking budgeting process, look back at what was previously funded and what revenues or cost outs the company actually realized. Doing both the backward looking and forward looking processes at the same time can help understand what looked like a good idea in the past but wasn't. That informs future decisions.

Don't get distracted

Avoid being distracted by:

1. What color of money each spend is
2. Previous perception of corporate strategy
3. What has already been spent
4. What someone says is a "must-spend"

Common Mistakes

Accountability, retrospection, and integrity

The most common business case mistake is allowing whoever can make up the highest number and write it down get the funding. Companies allow this when:

• They don't examine the market to determine if promised inflows are at all feasible
• They never look back to see how previously funded efforts are performing
• Truly innovative efforts have inflows that are impossible to predict, they don't know how to forecast them, and they allow authors to just promise astronomical returns
• Employees feel like their own positions won't get funded if their own business case isn't the best and thus have a conflict of interest in reporting honestly

Understanding types of cash inflow

Comparing business cases becomes more challenging when the promised financial benefits take different forms. Companies make mistakes when they confront these differences. Here are the most common promised financial benefits:

• Net new revenue. For example, a team developing a new product promises a new revenue stream once it sells
• Cost out. For example, an operations team proposes an investment that saves measurable time and money once complete
• Revenue protection. For example, a long-existing product team says the company must re-invest in their product lest they lose to new competitors.

Of the three, revenue protection is the most dangerous to your business case process. When launching a business case process, nearly every case will say "my tiny pet project must be funded because it relates to the company's primary line of business". Because such cases will promise cash inflows equal to all the primary projected revenues, every business case will request expenditure, promise huge revenues, and never actually bring in new money.

To cure, simply don't allow business cases to promise that revenue. Do any or all of:

1. Remove those business cases entirely
2. Allow those business cases only if approved by the single business executive responsible for maintaining the revenues being protected
3. Multiply revenue protected by a small fraction. For example, if not funding would decrease the chance of keeping the business by only 0.5%, multiply revenues for those business cases by 0.5%

Such steps will force the process to regard more attributable net new revenue and cost out business cases as more valuable.

Auto-approved expenditure and keeping the lights on

Especially if they're used to secure funding, each employee, initiative, and organization will see a the reform or initiation of a business case process as a threat. If allowed, each will dive for a reason it should not have to compete for resources. The most common is "I'm operationally vital". Challenge each one.

Layoffs vs retargeted human capital

Business case processes break when people think their continued employment or relevance depend on what they can promise on a business case. That creates a natural conflict of interest in which a person feels incentivized to promise more because it's the only way to keep their job.

That conflict of interest can't and shouldn't be completely removed. But more honest business cases will result when:

1. Executives and people managers match the talents of people who "lost" their business cases to the needs of funded initiatives. In that case, people feel their careers will continue even if their own business case is not selected.
2. Executives can apply accountability to funded efforts that don't deliver. That doesn't mean auto-firing people who were wrong about their business case projections. It does mean that people will feel less incentive to inflate their cash inflow projections as they become aware that business case inflation draws constructive feedback, not just the prestige that comes of "winning" funding.

Innovation, uncertainty, and breakout growth

The business case process detailed here ensures that investment follows the lowest risk and highest reward initiatives. It separates low risk from high risk. It does not separate high risk bad ideas from high risk innovative ones. That requires different planning. Check out Intro: We’re Not Set Up for the Innovative Business Case to learn how to do that.

Discussion and Conclusion

Although there are exceptions, most companies won't realize disruptive growth before first mastering the tools of consistent growth. One of those tools is setting up a solid business case process.