Nearly two decades of finance and accounting roles in the banking industry has provided me an avenue for building business models to support investment decisions. Whether pricing a single loan, calculating the gain or loss on a securitization transaction, or investing in a world-class analytics platform, the following pillars are critical in building a business case.
Cash is King
In every model, I follow the advice of a mentor early in my career, “Follow the Cash, Cash is King”. It is remarkable how many business cases get bogged down by trying to include depreciation/amortization into the model. Understanding the Generally Accepted Accounting Principles (GAAP) impact of an investment is certainly recommended but it does not belong in a Discounted Cash Flow (DCF) model.
Taxes are important as well. It may be as simple as multiplying your net cash flows by a tax rate but some investments will result in significant value by deferring taxes and thus, improving the timing of the model’s cash flow.
Use Time Wisely
Looking at a business decision through the lens of time promotes sound, long-term and profitable thinking. As mentioned in my last blog and as stated in the Fundamentals of Financial Management “of all financial concepts, the time value of money is the single most important concept of business”. Despite being taught this in our very first Finance class, it is remarkable how many capital expenditure models I have run into over the years that simply ignore this critical principle.
The chart below from techeconomyblog.com is a very simple demonstration of how important applying this principle is:
Think Like An Executive (Understand Risk & Uncertainty)
Presenting a business case or cash flow model with a single outcome is a recipe for disaster. It provides the decision makers the ability to challenge your assumptions and shoot arrows at a big target. On the other hand, a business case including scenario and sensitivity analysis provides a structure that can be used to demonstrate the risks involved in an investment. Demonstrate you have thoroughly analyzed the project. Present a best, expected, and worst case scenario while discussing the assumptions behind each. In my experience, this pillar has allowed me to step back and think like the person I want to convince, which is an extremely valuable exercise.
...And Now Some Remarkable Examples:
The Qlik Visual Analytics Platform is being used by over 2,500+ Financial Services firms across the globe including 46 of the Top 50 Financial Services firms on the Forbes 2000 List across the Americas and EMEA. The value achieved by our clients is truly remarkable and here are a few examples that would generate an impressive discounted cash flow model:
- WestPac’s Wealth Management division (BT Financial) achieved a 96% year-over-year increase in staff productivity; you can see the video here.
- Rabobank saved $10.2 million in cost savings by identifying unnecessary resources and either eliminated or reassigned them; you can see the story documented here.
- Qlik contributed to an incremental $85 million increase in bank revenue for Oversea-Chinese Banking Corporation's (OCBC) analytics team. You can read more about this award-winning application here.
There are many challenges to calculating the value and measuring the risks of an investment. Keep these three pillars in mind as you create your business case and calculate the financial impact of your potential investment to create credibility for both you and the investment thesis.