In this article we’ll explain the purpose of business cases modeling. In addition, we will point out some practical aspects for the modeling.

Business case – why?

A business case is the exemplary model of a business scenario. It generally serves to examine the pros and cons of an investment opportunity, always taking into consideration future financial and strategic implications. The overall objective of a business case is to serve as a basis for decision – mostly in the context of searching for the most economically advantageous alternative.

Pros and cons of modeling

Prior to modeling a business case, one should remember the major advantages and disadvantages of modeling itself.

Pros

• Complex issues in reality are easier to understand.
• Models allow for a better knowledge transfer.
• Models promote network thinking.

Cons

• The reality can not be fully represented.
• Information that is important for the understanding of the model is probably embezzled.
• Statements based on modeling have only limited validity.

When to make a business case

The modeling of a business case is only useful if a decision between two or more scenarios need to be taken. This is usually the case in the context of investment decisions, when questions like the following are to be answered.

• Which machine should be purchased (A or B)?
• Which business model is to be implemented (A, B or C)?
• Should the property for the company headquarters be purchased or rented?

Five questions before starting

• What decision should be supported by the business case?
• Who is the addressee of the business case and must be able to understand it?
How long of a time period should the business case address, so that it draws an accurate picture?
• To which degree should the business case analyze and represent the details of the situation or scenarios?
• How should the business case process and present its results to serve as an informed basis for decisions?

In addition, two typical errors during the subsequent modeling should be avoided, because they invalidate the business case.

• The business case does not help to answer the initial question.
• Wrong or old data or inappropriate methods used.

Business case modeling in practice

Ideally, business case modeling does not start on a spreadsheet, but first as a sketch on a piece of paper. Thinking oneself all the way through the business case is a top-down process (output → input), while the actual modeling happens bottom-up (input → output).

Already the paper sketch should include all sub-models of the business case (revenue model, cost model, funding model, etc.) and their components as well as the interdependencies between the sub-models.

This is followed by choosing the right method (static and/or dynamic process), the collection of data (input) and ultimately the actual modeling of the business case by means of a spreadsheet software (output).

The business case works with deposits and withdrawals according to popular belief that the actual cash flows reflect most directly the profitability of a business scenario.

 

Sources
Prexl, Sebastian et al. (2010): Financial Modeling, Stuttgart.
Soubega, Eric (2013): Mastering Financial Modeling. A Professional's Guide to Building Financial Models in Microsoft Excel, New York.
Taschner, Andreas (2013): Business Cases. Ein anwendungsorientierter Leitfaden, 2nd edition, Wiesbaden.

[November 2015]