Business cases

40 minIntermediate

Business cases

You have a $180,000 request on your desk: route planning software for the distribution centres' wholesale deliveries. This lesson builds its case month by month, the way Mangrove's finance team will check it: payback, NPV and IRR at the right monthly rate, sensitivity with switching values, and a one-page case the CFO can approve in stages.

By the end you can

Turn a vendor quote and a trial result into monthly incremental cash flows against a do-nothing baseline
Discount monthly cash correctly and calculate NPV, payback and discounted payback
Calculate IRR, convert it between monthly and yearly, and know when it gives the wrong answer
Run one-at-a-time sensitivity, read a tornado chart and find switching values
Present the case on one page with options, ranges, risks and a staged decision

The everyday picture

A delivery rider is offered an electric scooter for $1,200. It would cut his fuel bill by about $70 a month. He could also buy a $40 phone mount that lets him accept orders without stopping, worth maybe $30 a month in extra trips. The mount pays for itself in six weeks. The scooter takes a year and a half. Measured as a percentage return, the mount wins by a mile.

But he has money for only one this month, and the mount adds $30 a month while the scooter adds $70. A smart rider asks three more things. What is $70 in two years worth to him today, when his savings group pays 12% a year? How sure is the $70: was it measured on dry, flat roads? And how low could the saving fall before the scooter stops being worth it? A business case asks the same questions, with more zeros.

Build the cash flows against a baseline

You met the basics of a business case in pm-28, with 1,300 store scanners. This lesson goes deeper on the finance side with a new request. Mangrove's four distribution centres (North, East, South and West) make about 15,000 wholesale drops a month to partner shops. Each drop costs about $11 in driver time, fuel and truck costs (the drop cost from fin-02), so delivery costs about $165,000 a month. Planners draw routes by hand, mostly from habit.

A route planning vendor offers software for all four DCs at $4,500 a month. Before it can run, it needs a one-off integration with the WMS and the driver app ($110,000), training and rollout ($25,000) and about $45,000 of internal project time. That is $180,000 up front. In a 6-week trial at East DC, cost per drop fell by about 9%: fewer kilometres, and one more drop fitted into each route.

First, write down the baseline: what happens if you do nothing. Delivery keeps costing about $165,000 a month. It also gets worse. Partner growth (the plan to double partner revenue by FY2029) would need about 8 extra trucks with today's routes. A case measured against zero would miss that; a case measured against the baseline counts only incremental cash flows, the money that moves because of the decision.

Then build the months. Benefits ramp up as one DC goes live each month, while the vendor charges the full fee from month 1:

Output

Route planning, base case ($)
One-off, month 0
  Integration (WMS and driver app)          110,000
  Training and rollout                       25,000
  Internal project time                      45,000
  Up-front total                            180,000

Each month at full rate
  Saving  15,000 drops x $11 x 9%            14,850
  SaaS fee (all four DCs)                    -4,500
  Net per month                              10,350

Ramp: one DC goes live each month
  Month 1   25% of 14,850 = 3,712.50 - 4,500 =   -787.50
  Month 2   50%           = 7,425.00 - 4,500 =  2,925.00
  Month 3   75%           = 11,137.50 - 4,500 = 6,637.50
  Months 4 to 36                               10,350.00

Undiscounted net cash over 36 months         170,325

Two lines need a decision. The internal project time is salary Mangrove pays anyway, so it is not new cash. Mangrove's finance team still counts it, because those engineers would otherwise build something else: an opportunity cost. Follow your finance team's convention and say which one you used. The 8 trucks are a real benefit, but they depend on growth that has not happened yet, so show them as an upside outside the base case. And record cash in the month it leaves the bank, even where the accounts capitalise the integration work (fin-03).

Quick check

Which of these belongs in the route planning case as an incremental cash flow?