One of the best sources for business cases is SolutionsMatrix.com. Periodically, they send out newsletters that I still refer to today. One of the best newsletters is from a 2006 issue by Marty Schmidt, listing the top five mistakes in business case analysis:

1. Thinking “It’s finance and it’s hard”
2. Projecting income instead of cash flow
3. Omitting scenarios that help address the main question
4. Using financial metrics blindly
5. Omitting important benefits because they are “soft”

Below are Schmidt’s explanations of these business case mistakes verbatim:

Thinking “It’s Finance and it’s Hard”
For the those who build the case for decision support or planning, the challenge is not financial mathematics. The case may use a few simple financial metrics to communicate results, but the central challenge is deciding which costs and which benefits belong in the case in the first place. That is not finance. It s a matter of identifying all the important consequences of a proposed action, systematically and thoroughly.

Equipped with a few simple tools like the cost model and the “benefits rationale,” for instance, the task of ensuring that everything relevant comes into the case is straightforward and clear (it may be tedious at times, but it is straightforward and clear). See, for example, Business Case Essentials.

Projecting Income instead of Cash Flow
People may think that the primary result of the business case is a pro forma income statement. For the business case, however, the fundamental metric is cash flow, not income. Why?

First, many cases look into the consequences of actions that have little or nothing to do with producing income, especially in government or non-profit organizations. Beyond this, however, evaluating costs and benefits in terms of cash flow is a direct measure of each item’s worth. Income (or profit, or earnings), on the other hand, measures less directly, because income reflects accounting conventions such as allocated costs, depreciation expense, and others. These factors “muddy the waters” when trying to measure consequences that actually follow from one action or another.

You may include a projected income figure besides the expected cash flow if decision makers want to know what the proposal will do for reported income per se. But cash flow, not income, is the clearest answer to the basic question: Is this a good business decision?

Omitting Scenarios That Help Address the Main Question
We propose actions in order to make something better, trying to achieve cost savings, improved service quality, or increased sales revenues, for instance. A business case for an action aimed at any of these objectives needs at least two scenarios: a “proposal” scenario and a base case or “business as usual” scenario (or a “to be” and an “as is” scenario). Is the “business as usual” scenario really necessary?

The terms “savings,” “improved,” and “increase” are relative terms. We have to ask: Savings, relative to what? Improvement, relative to what? Increases over what? The “what” is a base case scenario that projects consequences if the proposal is not implemented. The base case scenario is indispensable if you want to know how much things will change.

Using Financial Metrics Blindly
The business case is not an exercise in finance (No. 1 above) but it may use a few simple financial metrics to summarize the meaning of projected cash flow values. Some popular financial metrics include ROI (return on investment), IRR (internal rate of return), NPV (net present value), TCO (total cost of ownership) and PBP (payback period). I have heard senior mangers say, for instance: “We’ll choose the investment with the better ROI,” or “We don’t undertake any major spending unless there’s a payback period of 18 months or less.”

Should important business decisions really turn on one or two such measures?

Each financial metric has strong points (it tells you something useful about projected cash flows). Each has weak points (it can mislead you when used blindly). Different metrics from the same projected cash flow statement, moreover, can point in different directions: one action has a high ROI but low NPV, the other action has a low ROI but high NPV. Which metric do you follow?

Also, each metric can be defined in several different ways. And, there is a lot of bad or just plain erroneous guidance coming from superficially respectable business case tools on the market. One vendor’s tool, for instance, tries to tell you that IRR “…is cash flow received over a period of time vs. capital outlay.” You should know that that IRR has several definitions but that is certainly not one of them. Following that kind of guidance will not enhance your credibility.

Every business case producer and business case user is well advised to take a very little time to learn what each metric really does say and what it does not say (see, for instance our free financial metrics spreadsheet or Financial Metrics Pro for illustrations and explanations). You don’t need an MBA to build or use the business case. You do need a comfortable, definition-level understanding of a handful of simple business measures, and their strengths and weaknesses. Using tools or templates blindly without that understanding is a formula for disaster.

Omitting important Benefits Because they are “Soft”
There is a widespread belief that some benefits (positive consequences of the action under analysis) are second-class citizens: real contributions to important objectives are sometimes labeled “soft” and omitted from the case. “Soft” usually means “unlikely” or “cannot be measured in financial terms.” A benefit that is not valued in financial terms contributes exactly 0 to the cash flow summary. Is that appropriate? (For more on bringing “soft” and “difficult” benefits into the business case, see our whitepaper “Soft Benefits in a Hard Business Case.”).

Schmidt’s business case templates and newsletters are must-have tools in your toolkit. Check out his downloads area for free whitepapers . Buy Schmidt’s resources, you won’t regret it.

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