Simple Business Case Template | By ex-McKinsey Consultants

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Business Case
Training & Excel Templates
By ex Deloitte &
McKinsey
Consultants

22
Aurelien Domont
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Managing Director
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Case with a training and an Excel template
created by ex Deloitte & McKinsey
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Objectives of this document
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33
Table of content
The key concepts to know to build a Business Case
How to build a Business Case?
2
3
What is a Business Case?1
How to develop a Financial Model?4

44
Business Case’s goal and objectives
The Business case’s goal
is to complete a rigorous
analysis of a potential
project to facilitate the
decision on whether the
project should be
undertaken
The business case is a
differential analysis that
makes a comparison
between the current state
(As-Is) and the target state
as a result of the project
(To-Be)
Goal
Determine the potential value and value drivers of the project
Define the costs and expected benefits of the project
Determine if the project support the overall business strategy
Define the time-phased net cash flow impact, return on
investment and payback period of the project
Objectives

55
Key questions a Business Case should answer
1.What is the project?
2.How much value will it create?
3.What needs to be done?
✓
✓
✓
Description
Value Proposition
Likely impact(s)
✓
✓
✓
NPV of the investment
Resulting cash flow impact
IRR and payback period
✓
✓
✓
Organizational changes
Process & systems changes
Culture changes
Go or No Go?
✓

6
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77
Table of content
2
3

88
The weighted average cost of capital (WACC)
Description Calculation
• WACC is calculated by multiplying the cost of each
capital component by its proportional weight and then
summing
Where:
✓ E = market value of the firm's equity ($)
✓ D = market value of the firm's debt ($)
✓ V = E + D ($)
✓ E/V = percentage of financing that is equity (%)
✓ D/V = percentage of financing that is debt (%)
✓ Ce = cost of equity (%)
✓ Cd = cost of debt (%)
✓ Tc = corporate tax rate (%)
• The weighted average cost of capital (WACC) is
the rate that a company is expected to pay to
finance its assets
• Assets are financed by either debt or equity.
WACC is the average of the costs of these
sources of financing, each weighted by its
respective use
• A project return on investment should be at least
equal to the WACC to satisfy its creditors,
owners, and other providers of capital
WACC =
E
X Ce +
D
X Cd X (1-Tc)
V V

99
Payback period
Payback period is calculated as:
• The payback period is the length of time
required to recover the cost of an investment or
to reach the break-even point
• The lower the project’s payback period, the more
desirable it is to undertake the project
• The time value of money is not taken into
account
Payback Period =
Initial investment
Annual Return

1010
Operating cash flow (OCF)
• OCF is calculated as:
Operating cash flow =
EBIT - Interest - tax + Depreciation & amortization
• The Operating cash flow (OCF) refers to the
amount of cash a company generates from the
revenues it brings in, excluding costs associated
with long-term investment on capital items or
investment in securities
• I can also be called cash flow provided by
operations, cash flow from operating activities
(CFO) or free cash flow from operations (FCFO)

11
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1212
Free cash flow (FCF)
• FCF is calculated as:
Operating cash flow - Capital Expenditures
OR
EBIT X (1-Tax Rate) + Depreciation & Amortization -
Change in Net Working Capital - Capital Expenditure
• Free cash flow (FCF) represents the cash that a
company is able to generate after laying out the
money required to maintain or expand its asset
base
• FCF gives a clear view of the company’s ability
to generate cash

1313
Net present value (NPV)
• The following is the formula for calculating NPV:
Where:
✓ Future value = future cash inflows - future cash outflows ($)
✓ r = discount rate
✓ t = number of time period
• The Net present value (NPV) is a tool used to
analyze the profitability of an investment, taking
into account that a dollar earned in the future
won’t be worth as much as one earned today
• This tool uses a discount rate to determine the
present value of future cash inflows and cash
outflows
• A firm's weighted average cost of capital is often
used as the discount rate, but many executives
believe that it is appropriate to use higher
discount rates to adjust for risk and opportunity
cost
NPV = Future Value X 1 / (1 + r) t - Initial Investment

1414
Internal rate of return (IRR)
• The internal rate of return (IRR) is the discount
rate that makes the net present value of all cash
flows from a particular project equal to zero
• The higher the project’s internal rate of return,
the more desirable it is to undertake the project
• IRR is sometimes referred to as Economic rate
of return (ERR)
NPV = Future Value X 1 / (1 + IRR) t - Initial Investment = 0
The higher, the better
NPV
Discount rate
2m
1m
0
-1m
-2m
5% 10% 15%
IRR = 8%
Example of relationship between NPV and Discount rate

1515
Economic value added (EVA)
• The formula for calculating EVA is as follows:
Where NOPAT = Net operating profit after taxes
• Economic value added (EVA) attempts to
capture the true economic profit of a company
• EVA is the profit earned by the firm less the cost
of financing the firm's capital
EVA = NOPAT – (Capital X Cost of capital)

1616
Table of content
2
3

1717
A business case needs to include 3 phases
1.Carry out a benefits /
costs analysis
2.Prepare financial
statements and
model
3.Conduct financial
analysis
+ -
X -..

1818
Phase 1 - Carry out a cost / benefits analysis
1.Carry out a benefits / costs
analysis
2.Prepare financial
statements and model
3.Conduct financial
analysis
1. Determine benefits
✓ Revenue benefits
✓ Cost benefits
2. Determine additional expenditure
✓ Capital expenditure
✓ One time costs
✓ Recurring costs
Key Steps
+ -
X -..
1. Take into account of both the internal and external
factors influencing the financials
2. Create assumptions What is the WACC?
✓ What is the starting year of the project?
✓ What is the benefit realization timeframe?
✓ What is the exchange rate?
✓ What is the annual inflation?
✓ What is the company tax rate?
✓ What is the cost per man-day for external
resources?
✓ When do we want to support costs in the
P&L?
✓ Are the benefits progressive?
3. List assumptions on an independent Excel sheet
Recommendations

1919
Phase 2 - Prepare incremental financial statements
analysis
2.Prepare financial
3.Conduct financial
analysis
1. Prepare incremental income statement
2. Prepare incremental balance sheet
3. Prepare incremental cash flow statement
4. Develop a financial model
+ -
X -..
Key Steps Recommendations
1. Structure the financial model based on the
value drivers, the inputs and the
assumptions
2. Build the financial model using an iterative
approach
3. Test the financial model looking for errors

2020
Phase 3 – Conduct financial analysis
analysis
2.Prepare financial
3.Conduct financial
analysis
1. Calculate NPV
2. Calculate IRR
3. Calculate Payback period
4. Calculate the EVA
5. Compare the current situation and the
target situation
+ -
X -..
Key Steps Recommendations
1. NPV should be higher than zero, in order to
maintain the firms current share price
2. Be aware of the company investment
criteria (i.e. what is the minimum levels of
NPV and IRR)
3. Use the Pareto principle (the 80 / 20 rule)
to make sure you focus on what matters

21
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2222
Table of content
2
3

2323
Financial model structure
An effective Excel financial model should have the following structure:
1.Project
Description sheet
4.Inputs
sheet(s)
5.Calcula-
tion sheet(s)
6.Outputs
sheet(s)
+ -
X -..i
2.Worksheet
Description
3.Worksheet
Flow

2424
1.The Project description sheet should include:
✓ The project name
✓ The name of the scenario
✓ A brief description of the project
✓ The model version
✓ The file name
✓ The name of the persons who prepared and reviewed the model
✓ The names of project sponsor and the project leader

2525
1.Project description sheet Excel template
Project X
Version 1
Project Description
Scenario X
Project Name: Project X
Porject Category Category X
Business Unit: Business Unit X
Model Version: Version 1
Date prepared: 03-Jan-14
Mr Smith
Manager
Business Unit X
Michael Cant
Executive Manager
Business Unit X
Project Leader: Mr Smith
Manager
Business Unit X
Model Prepared By:
Project Sponsor:
Project Description
Insert a brief description of the project
Project Details
Double click
to access the
editable
Excel
spreadsheet

2626
2.The Worksheet description should include:
✓ The Financial model purpose
✓ A worksheet overview with the name, the type and the description of each sheet
✓ If required, some guidance on how works each sheet
✓ The colour codes and formatting conventions used in the financial model
i

2727
2.Worksheet description Excel template
i
Project X
Version 1
Worksheet Description
Scenario X
Sheet Name Sheet Type
Assumptions Input
Sheet X Calulations
Sheet Y Output
User Input cells 3,000,000$
Formula amounts 3,000,000$
Cells which you want to draw attention to 3,000,000$
Conditional formatting showing Active Scenario
Currency 4,000$
Negative currency (300,000)$
FTE figures (1dp) 1.5
Worksheet Overview
Financial Model Purpose
Exemple: To calculate the project X expenditure, net benefit and NPV
Color Codes
Formatting Conventions
Description
Input your financial model assumptions for
up to 5 scenarios. Select the active
Double click
to access the
editable
Excel
spreadsheet

2828
3.The Worksheet Flow should include:
✓ A visual representation of the inputs sheet, calculations sheet(s) and outputs sheet(s)
✓ The relationship between each sheet of the document
✓ Links towards each sheet of the document in order to facilitate the navigation

2929
3.Worksheet Flow Excel template
Project X
Version 1
Worksheet Flow
Scenario X
Assumptions
Inputs sheet
Project Resources
Cost
Calculation sheets
Financial Summary
Outputs sheet
Project P&L
Project Capex
Double click
to access the
editable
Excel
spreadsheet

30
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3131
4.The Inputs sheet should include:
✓ Your company standard assumptions:
Assumptions that are used to assess all the projects of the company
✓
Your static assumptions:
Assumptions specific to your project and constant over the whole modeling period (e.g. tax rate)
✓ Your dynamic assumptions:
Assumptions specific to your project and changing over the whole modeling period (e.g. growth rate)
✓ The source and updated date of all assumptions
✓ The possibility to select your scenario

3232
4.Inputs sheet Excel template
Project X
Version 1
Assumptions
Scenario X
Scenarios
Input Active Scenario Number 4 1 2 3 4 5
Active Scenario Name Scenario X Base Worst Best Scenario X Scenario Y
Base Scenario Flag 1 1
General Company Assumptions Base Worst Best Scenario X Scenario Y
Company Tax Rate 30% 30% x x x x
Cost of Capital 11% 11% 8% x x x
Discount Rate 11% 11% 10% x x x
CPI (Wage) 3% 3% x x x x
CPI (non wage) 3% 3% x x x x
Insert assumption x x x x x x
Project Static Assumptions Base Worst Best Scenario X Scenario Y
Project Start Date 1-Jan-14 1-Jan-14 x x x x
Inflation Start Date 16-Jan-14 16-Jan-14 x x x x
Benefit Ramp Up Start Date 16-Jan-14 16-Jan-14 x x x x
Benefit Ramp Up Duration (Months) 6 6 x x x x
Gross Profit Margin per product 40% 30% 40% 40% 40% 40%
Double click
to access the
editable
Excel
spreadsheet

3333
5.The Calculation sheet(s) should include information such as:
✓ The calculation of the revenue generated by the project
✓ The calculation of the cost savings generated by the project
✓ The calculation of the project operational expenditure (OPEX)
+ -
X -..
✓ The calculation of the project capital expenditure (CAPEX)

3434
5.Calculation sheet Excel template:
+ -
X -..
Project X
Version 1
Project P&L
Scenario X
FY1 FY2 FY3 FY4 FY5 Total
Volume: Number of products sold
Product A 10,000 20,000 30,000 50,000 100,000 210,000
Product B 50 100 200 500 1,000 1,850
Product C 10 20 30 50 100 210
Price: Average Price per product
Product A 1,000$ 1,050$ 1,050$ 1,050$ 1,050$ 5,200$
Product B 100$ 100$ 105$ 105$ 105$ 515$
Product C 10,000$ 10,500$ 10,500$ 10,500$ 10,500$ 52,000$
Revenue: Product multiply by Price
Product A Revenue 10,000,000$ 21,000,000$ 31,500,000$ 52,500,000$ 105,000,000$ 220,000,000$
Product B Revenue 5,000$ 10,000$ 21,000$ 52,500$ 105,000$ 193,500$
Product C Revenue 100,000$ 210,000$ 315,000$ 525,000$ 1,050,000$ 2,200,000$
Total Revenue 10,105,000$ 21,220,000$ 31,836,000$ 53,077,500$ 106,155,000$ 222,393,500$
Double click
to access the
editable
Excel
spreadsheet

3535
6.The Outputs sheet(s) should include information such as:
✓ Total add revenue and cost savings
✓ Total add operational expenditure
✓ Taxes and net income
✓ Change in WC, capital expenditures, operating free cash flow
✓ Present value, cumulative present value and net present value
✓ IRR, payback period, payback period discounted

3636
6.Outputs sheet template
Project X
Version 1
Financial Summary
Scenario X
Economic Value Added (EVA)
Revenue 10,105,000$ 21,220,000$ 31,836,000$ 53,077,500$ 106,155,000$ 222,393,500$
Cost of Goods sold 6,063,000$ 12,732,000$ 19,101,600$ 31,846,500$ 63,693,000$ 133,436,100$
Operating Expenses 783,000$ 940,955$ 1,107,630$ 1,136,486$ 1,028,202$ 4,996,273$
Capitalized Expenditure 60,000$ 60,000$ 60,000$ 60,000$ 60,000$ 300,000$
Net Benefit 3,199,000$ 7,487,045$ 11,566,770$ 20,034,514$ 41,373,798$ 83,661,127$
Average Net Book Value 80,000$ 140,000$ 120,000$ 100,000$ 80,000$
Cost of Capital 11% 11% 11% 11% 11%
Capital Charges 8,800$ 15,400$ 13,200$ 11,000$ 8,800$ 57,200$
Economic Value Added (EVA) 3,190,200$ 7,471,645$ 11,553,570$ 20,023,514$ 41,364,998$ 83,603,927$
Net Present Value of EVAs $99,822,374.94
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
$90,000,000
Economic Value Added
Double click
to access the
editable
Excel
spreadsheet

37
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