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When a recommendation is made for anything from purchasing a piece of equipment to adding new employees, making an acquisition,or recommending a new company strategy; it is necessary to describe the financial impact of the recommendation.
What it is: Each recommendation you make has a financial impact. For completeness in your recommendation, you should always include a forecast of the financial impact of your recommendation and, if possible, a comparison to the financial impact of the status quo and other alternatives considered. The financial outcome is a forecast of the impact of implementing the recommendation with a number of assumptions built in. Where possible, it is best to provide a range or a probabilistic forecast versus a single-point forecast.
What it does: The forecast of returns on the recommendation allows the leadership team to decide if the returns are worth the resources deployed and the risks taken to implement the recommendation. While finances are not the sole measure of value created by a recommendation, it is a measure of success that can not be ignored. Also, the financial analysis allows a comparison to the other alternatives considered and the always-present alternative of doing nothing and remaining in the status quo. It also provides a scorecard of how well the recommendation met the forecast projections.
How is it used: Provides a key informational point to the decision-maker of whether or not they should implement the recommendation. It provides a metric the success of the recommendation can be compared to after the implementation of the recommendation.
Where: While many business leaders do not ask for a financial estimate of the impact on earnings for a recommendation, it should almost always be offered. When a market plan is presented for projects using funds for advertising, sales materials, and customer service offerings, there should be an estimate of the cost and the projected change in revenue and returns. If a new piece of equipment is purchased to increase productivity, then the financial returns are necessary to determine if it is worth the resources expended.
Why: Making decisions without understanding the impact on returns is like trying to drive a car while blindfolded.
Where it shouldn't be used: Recommendations that are driven by government regulations and other activities where you have no options available do not require a financial estimation, but you still may want to be aware of the financial impact for planning purposes.
Any restrictions: If the decision is small and assumed to have little impact on resources or returns, it may not be worth the time and effort to complete the analysis.
Warnings: Single-point forecasts are risky because they give no insight into the potential variations. Based on the assumptions made in the financial analysis, the returns may be projected to be very positive, but under certain other assumptions, the forecast of returns could be very negative. If you do not have some range identified, then a single-point forecast can be misleading. Consider taking one of the following approaches:
A three-point forecast of estimated returns based on worst, base and best case scenarios
A full probabilistic forecast using a Monte Carlo simulation like Crystal Ball or @Risk
A 60 Minute Recipe for creating a Simple Project Finance Model—Part 1
A 60 Minute Recipe for creating a Simple Project Finance Model—Part 2
A 60 Minute Recipe for creating a Simple Project Finance Model—Part 3
A 60 Minute Recipe for creating a Simple Project Finance Model—Part 4
A 60 Minute Recipe for creating a Simple Project Finance Model—Part 5
Gathering data: Utilize traditional modeling practices to gather data. See the processes found in the library documents below:
Analysis of data: Use the data you have captured and modeled to complete specific comparative analysis ratios and other approaches like those below:
Cash Flow Analysis
Internal Rate of Return
Payback Period
Accounting Rate of Return
See this link for many of the formulas for these ratios and analyses
Interpretation of results: Use comparison tables, Efficient Frontier, weighted priority tables and soft factors to determine the best alternative based on the financial analysis and common sense.
Presentation of results: Use the charts, tables, and graphs completed in the above analyses to display the findings and highlight the decision choice.
Use the charts, tables, and graphs completed in the above analyses to display the findings and highlight the decision choice.
This content is provided to you freely by Ensign College.
Access it online or download it at https://ensign.edtechbooks.org/projectbased_internships/estimating_returns_for_a_recommendation.
