When preparing a business case, it is good practice to produce several different scenarios or financial pictures, such as best case, worst case, and most likely case, to assess costs.
BUSINESS CASE COSTS
business case usually contains a cost-benefit analysis because this is often a critical factor that upper management uses to decide whether a project is worth undertaking.
When preparing a business case, it is good practice to produce several different scenarios or financial pictures, such as best case, worst case, and most likely case, to assess costs.
It is also important to conduct "what-if" analysis, which shows what will happen if some of the assumptions are not realized.
Here are some of the different costs that must be considered when developing a business case:
OPPORTUNITY COST
Opportunity cost is the cost of something in terms of an untaken opportunity (and the benefits that could be received from that opportunity) or the most valuable alternative.
HIDDEN COST
An unseen opportunity cost can become the hidden cost of that course of action. If there is no explicit monetary cost attached to a course of action, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all.
MARGINAL COST
Marginal costs are the costs of producing one more product or providing one more transaction.
TIME VALUE OF MONEY
The time value of money is the value derived from the use of money over time. The present value is the value today of an amount that would exist in the future with a stated investment rate. Future value is the value in the future of a known amount today with a stated investment rate.
DISCOUNTED CASH FLOW
The discounted cash flow calculates the value of a future cash flow in terms of an equivalent value today. A future cash flow is discounted at some rate back to its present value so that all dollars, regardless of when collected, can be compared.
COST OF CAPITAL
The cost of capital is the rate of return that is necessary to make a project viable. This includes the interest rate, which is the cost of borrowing money, and the hurdle rate. This is the minimum return on investment that a new product must exceed.
ECONOMIC LIFE
Economic life is the period of time during which an asset will have economic value and be usable.
TERMINAL VALUE
Terminal value is the value of an investment at the end of a period, taking into account a specified rate of interest. It is the value of a fully depreciated asset, such as a car or a computer at the end of its life.
Estimates for a project should include a number of costs:
- obtaining quotations from the different contributors to the project, such as suppliers, contractors, consultants, and outsourcers
- calculating the cost of the development work
- researching the cost of training staff
It is important that you take all of the major costs of a project into consideration when preparing a business case.
For example, if you want to install a web-based ordering system in your company, it is vital that you include the cost of retraining staff and educating staff and customers in the costs.
If you only include the cost of installing IT equipment, you could be underestimating the total cost of the project by a significant margin.
If a company is relocating, it is important that all costs are taken into consideration, not just the cost of the new building.
Staff relocation costs, updating the company's address on all official literature, communications connections, and mail delivery will all need to be taken into consideration of and costed for.
QUESTION
Match each of the costs that should be considered when preparing a business case with its definition.
- Opportunity cost
- Hidden cost
- Marginal cost
- Cost of capital
- Economic life
- Terminal value
- This is the cost of something in terms of an untaken opportunity, or the most valuable alternative
- An unseen opportunity cost
- The cost of producing one more product or providing one more transaction
- The rate of return that is necessary to make a project viable
- The period of time during which an asset will have economic value and be usable
- The value of an investment at the end of a period, taking into account a specified rate of interest
This is the definition of opportunity cost.
Money that is spent on one item is not available to spend on an alternate item.
This is the definition of hidden cost.
An unseen opportunity cost can become the hidden cost of that course of action. If there is no explicit monetary cost attached to a course of action, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all.
This is the definition of marginal cost.
This is the cost of creating an additional unit for a transaction.
This is the definition of cost of capital.
This includes the interest rate, which is the cost of borrowing money, and the hurdle rate.
This is the minimum return on investment that a new product must exceed when it passes a particular phase of development.
This is the definition of economic life.
For example, this could refer to the lifespan of a piece of equipment used by a business. It could also refer to the length of time over which rent could be charged on a building
This is the definition of terminal value.
It is the value of a fully depreciated asset.
I have been teaching and training agents, team leaders, supervisors, managers and admins of call centers and other businesses in BPO related fields. This series, comes as a result of that experience. I have more than 4,000 modules that I plan on sharing here. This is # 006-07