How to Apply a Business Case to Create a Winning Investment Strategy

How to Apply a Business Case to Create a Winning Investment Strategy

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A business case is a systematic illustration of the benefits that a product or service offers to a customer. It is frequently presented in a well structured written document, however, can also be presented as a concise verbal representation. The purpose of a business case is not to explain every possible benefit or feature of an invention, but to demonstrate why that invention would be advantageous to the recipient. An example would be if a physician developed a new painkiller that eliminated the need for regular injections of morphine. The doctor could then demonstrate this ability in a hypothetical business case for his proposed business.

The purpose of a business case is to present and evaluate the key elements associated with the project. These key elements are called the “Causes.” The “enges” or “risks” are any unforeseen costs that would arise during the project, as well as any known benefits that may result. The “Key Benefits” are those direct, tangible benefits associated with the project, those which a reasonable person would expect to receive from the project. All of the key elements should be sufficiently compelling to encourage the reasonable person to make an investment decision.

To prepare a good business case, the following five elements must be present: an explanation of the cause or reason for the project, a discussion of the potential benefits, an explanation of the method by which the project will be executed, a description of the steps that will be involved in bringing the project to fruition and a description of the method by which any cost overruns, errors, delays or cost overruns will be addressed. The explanation of the cause or reason for the project is necessary because it becomes the driving force behind the investment analysis. The detailed description of the methods of execution is necessary because each step in the process is assumed to have an impact on the implementation. The description of the steps or activities that will be performed or implemented should be described using comparable situations so that the comparison of the anticipated results against the actual results can be based upon reasonable data. Finally, the description of the method by which any costs or errors will be addressed is important because it removes the burden of estimating future costs or delays.

In evaluating investment projects, the primary focus of the business case is the underlying assessment of the personal life of the individual who will be the primary beneficiaries of the investment. Much of the risk inherent in investing in a particular business case exists in the area of the business case itself. For example, if the project has no direct relationship to personal life, there is not a strong reason for the individual involved in the project to be aware of the risks. It becomes much less important to evaluate such projects in terms of their relationship to personal life if the projects’ returns are based on other measures of return.

The investment will also need to be evaluated according to the expected returns in two timescales: one, over the short term, when the benefits of the investment begin to become evident and the organisation’s assets begin to accumulate; and two, over the long term, once the benefits become evident and the organisation’s balance sheet begins to show a steady decline in assets and net worth. In terms of the evaluation of the risk of investment, there are two considerations to make. One is the risk that a company may experience if it does not make the investment in a timely fashion. The other consideration is whether the organisation will lose money if it does make the investment and that is primarily determined by looking at the likelihood of the company incurring significant losses in the early part of its operation and how those losses are subsequently handled in the later part of its operation. Thus it is important that the investor considers both of these periods separately and uses a multiple timescales model to evaluate them.

Finally, it is important to understand that a business case is really just a tool that can be used to create and document the details of an investment that makes it easier to determine the risks associated with an organisation. To some extent the business case is used to provide a framework in which the organisation can work with an investment manager to develop a clear picture of what it is trying to achieve and the steps it is going to take to get there. However, in the end, it is really up to the company to determine whether it has developed a compelling business case and to use that framework to determine the appropriate steps to take in order to achieve its goals.

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