{"id":3013,"date":"2017-06-12T08:39:48","date_gmt":"2017-06-12T13:39:48","guid":{"rendered":"http:\/\/flevy.com\/blog\/?p=3013"},"modified":"2017-05-25T11:49:21","modified_gmt":"2017-05-25T16:49:21","slug":"when-the-stakes-are-high-build-a-proper-business-case","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/when-the-stakes-are-high-build-a-proper-business-case\/","title":{"rendered":"When The Stakes Are High! Build a Proper Business Case"},"content":{"rendered":"<p><em>Editor\u2019s Note:\u00a0Ganesh Rajagopalan is a seasoned management consultant and former investment banker. \u00a0He is also a leading author on Flevy, having published numerous business frameworks on topics such as Strategy Development, Investment Analysis, and Value Chain Analysis. \u00a0<a style=\"color: #001a66;\" href=\"https:\/\/flevy.com\/seller\/ganesh10\">You can view all his materials here.<\/a><\/em><\/p>\n<p style=\"text-align: center;\">* * * *<\/p>\n<h2><img decoding=\"async\" class=\"alignright size-medium wp-image-3014\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2017\/05\/money-40603_960_720-300x275.png\" alt=\"money-40603_960_720\" width=\"300\" height=\"275\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2017\/05\/money-40603_960_720-300x275.png 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2017\/05\/money-40603_960_720.png 785w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>The Context<\/h2>\n<p>Businesses look to grow and be competitive by taking decisions on, new products, new markets, new production facilities, new technology, increase market share etc.<\/p>\n<p>This could involve large investment of funds in, R&amp;D, capacity increase, buying new technology, buying new companies, brands, large advertising expenses etc.<\/p>\n<p>Capital expenditure or \u2018Capex\u2019 represents the growing edge of a business and is needed to maintain competitiveness. Future profits &amp; its growth depends upon the return new capital investment generate and is under the constant scrutiny of the market.<\/p>\n<h2><strong>The Issues<\/strong><\/h2>\n<ul>\n<li>Large outlays are involved initially.\n<ul>\n<li>Returns come by way of cash flows in future.<\/li>\n<li>These are long term commitments (3, 5, 10, 20 years or more).<\/li>\n<li>Once committed these could be irreversible &#8211; at best the project can be abandoned which can result in major losses as usually the investment amounts are large.<\/li>\n<li>Also a number of competing opportunities present itself to the business and only the best\/optimum ones should qualify. So capital allocation should be optimum as resources a business commands are limited.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>Capex projects have a long term impact since the firm commits itself for the future which is not certain. Therefore capex decision can considerably influence the risk complexion of business.<\/p>\n<p>From a financial perspective there is the problem of how to relate the current or \u2018investment mode\u2019 cash out-flows with a stream of future in-flows.<\/p>\n<h2><strong>The Methodology<\/strong><\/h2>\n<p>Capex need to be evaluated more strategically and using techniques that can take care of the issues mentioned above.<\/p>\n<p>\u2018Capital Budgeting\u2019 (also termed <a href=\"https:\/\/flevy.com\/browse\/business-document\/capital-investment-analysis-230\">Capital Investment Analysis<\/a>) provides a framework for the evaluation of such investment proposals.<\/p>\n<ul>\n<li>\u2018Capital\u2019 refers to the funds that needs to be invested i.e. the assets to be bought\/created using the funds, which in turn would contribute to the growth\/competitiveness.<\/li>\n<li>\u2018Budgeting\u2019 refers to the estimation of the funds that may be required initially and also the estimation of cash flows that the assets so procured will generate in the future.<\/li>\n<\/ul>\n<p>The need for a business to earn a sufficient rate of return over and above its cost of funds is well understood. While there are many approaches, the most popular ones take into account that a dollar today in hand is not equal to a dollar to be received in future. This is because<\/p>\n<ul>\n<li>Future dollar may or may not come &#8211; in full and\/or on time as expected \u2013 also called cash flow risk &amp;<\/li>\n<li>Purchasing power of dollar in future may not be the same as that of today (inflation).<\/li>\n<\/ul>\n<p>Then there are<\/p>\n<ul>\n<li>Strategic considerations involved in long term investment decisions<\/li>\n<li>Practical aspects of the inputs required to calculate the return on such long term investments.<\/li>\n<li>The risks associated with long term investments\u00a0 &amp; how to factor-in such risks<\/li>\n<li>The processes involved in long term investment decisions &amp; its implementation and so on.<\/li>\n<\/ul>\n<div class=\"aside\">Many of the concepts discussed in this article are covered in the author&#8217;s 101-slide\u00a0framework presentation on <a href=\"https:\/\/flevy.com\/browse\/business-document\/capital-investment-analysis-230\">Capital Investment Analysis found here<\/a>.<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Editor\u2019s Note:\u00a0Ganesh Rajagopalan is a seasoned management consultant and former investment banker. \u00a0He is also a leading author on Flevy, having published numerous business frameworks on topics such as Strategy Development, Investment Analysis, and Value Chain Analysis. \u00a0You can view all his materials here. * * * * The Context Businesses look to grow and&hellip;&nbsp;<a href=\"https:\/\/flevy.com\/blog\/when-the-stakes-are-high-build-a-proper-business-case\/\" rel=\"bookmark\"><span class=\"screen-reader-text\">When The Stakes Are High! Build a Proper Business Case<\/span><\/a><\/p>\n","protected":false},"author":72,"featured_media":3014,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[81],"tags":[1220,190,189],"class_list":["post-3013","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-strategy","tag-business-case-development","tag-capital-budgeting","tag-capital-investment"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/3013","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/72"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=3013"}],"version-history":[{"count":1,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/3013\/revisions"}],"predecessor-version":[{"id":3015,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/3013\/revisions\/3015"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media\/3014"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=3013"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=3013"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=3013"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}