Malik, like several small business owners, is reactive. He is about to go rent or purchase a new truck for Rachel without having reviewed any of the facts. And while the decision may ultimately be the right one, the first thing to do before going forward with such an expense is to see if it’s worth it and if the business can afford it. To do this in structured way, a simple business case can be done. When it comes to making business cases in a small company, there are a few key things to keep in mind. Small companies often operate with tight budgets and limited resources, so it's essential to be strategic and efficient in how you present your case and allocate resources.

Defining the Problem or Opportunity

Before starting a business case, it's important to clearly define the problem or opportunity that is being addressed. This will help to stay focused and ensure that the case is relevant to the needs of the company. For example, if a new product is to be introduced, explaining how it addresses a specific customer need or solves a particular problem is necessary. If like in Malik’s case a new vehicle is being considered for purchase, the reason for purchase must be clear beforehand.

Research and Data Gathering

To make a compelling case, a thorough research to support the arguments should be conducted. For new products or services, it can include gathering data on market trends, researching similar products or services, and speaking with potential customers to understand their needs. If the case is for a truck replacement, gathering data on maintenance, lost revenues due to downtime, and potential revenues lost if the second worker was on his own should be included at the very least. The more evidence there is to support the case, the it will be to make a decision.

Costs and Benefits

When making a business case, it's important to clearly outline the costs and benefits of the proposal. This will help understand the potential return on investment and make an informed decision. Both financial and non-financial benefits should be included in the analysis, as these can be just as important to a small company as financial gains. For instance, Rachel’s frustration is non-financial so getting her a new truck may help with retaining her in the company.

Potential Risks

Every decision comes with a certain level of risk. So, it is important to identify the potential risks associated with the proposal, and explain how they will be mitigated. When launching a new product or service, risks may include lack of customer adoption or exceeded costs making the endeavour non-profitable. Other risks include capacity for delivering the product, change in market, and quality or reliability of the new product.

For Malik’s case, purchasing a truck has also potential risks. Firstly, it is entirely possible that the current vehicle has had most mechanical issues resolved and will operate flawlessly for several years to come. This in turn removes one of the most compelling reasons to purchase. Additionally, if the market slows down significantly, Malik now has two trucks and two workers and less income. Workers will have less work which may make them frustrated, and Malik more fixed expenses. These risks can be addressed but required careful planning before making a decision.

Understanding Return on Investment

ROI is a commonly used financial metric to know whether a project will be profitable or not. ROI has two main components which can be broken down from the following formula.

Firstly, net income is the forecasted income generated from the investment, free of expenses. In the case of a truck and plumber, it consists of how much more money that truck and plumber will bring to the company. An annual average number for plumbing companies is $225,000.

Concerning the total cost of the investment, it includes the money that the company must spend to bring in the extra income. For a truck, it goes without saying that the total cost of the truck will be included. If the truck is financed, interest should also be added to cost. It is also recommended to include plumber salary as well as material costs needed to generate this income. Let’s assume that a truck costs $70,000, that a plumber costs $100,000 per year, and that yearly materials per plumber cost $50,000, the total cost of the investment for the first year is $220,000. As you can see, if calculated over a single year, an ROI of 2% is not a great investment idea. However, ROIs tend to be calculated over several years. The same calculation over 5 years will yield an ROI of 37% – much more interesting.

Takeaway

When creating a business case, it is important to clearly define the problem and gather relevant data to justify the decision. Both financial and non-financial aspects must be included in the decision. It is also important to ensure that risks are identified and mitigated and that the whole decision fits with the company’s mission. And while non-financial justifications are important, it’s the financial part that usually drive the decision, with ROI being the mostly used decision metric. The article on forecasting finances provides more insight on how to approach the financial aspect of business casing.