Chapter 20: Financial and Quantitative Feasibility

Chapter 20: Financial and Quantitative Feasibility

Video: Financial Analysis in Cases: Situation Review, Modelling, and Sensitivity

Learning Objectives

By the end of this chapter, you should be able to:

• translate strategic recommendations into financial implications
• identify key assumptions
• estimate revenue, costs, and profit impact
• evaluate ROI and other relevant financial measures
• use sensitivity analysis appropriately
• connect financial results to the decision maker's priorities

Why This Matters

A strategy may be attractive.

• Customers may love it.
• Employees may support it.
• Competitors may struggle to copy it.

But if it destroys value, you need to know. Financial analysis provides another test of the recommendation. Your analysis should ultimately connect to financial impact, particularly when the audience is a CEO or senior executive.

Discover Your Mad Skills Principle

Don’t just calculate the numbers. Use the numbers to make the decision.

Start With the Economics

Identify the major changes.

• Revenue: How does the recommendation change revenue?
• Costs: What new costs are created? What costs disappear?
• Profit: What happens to profitability?
• Investment: How much capital is required?
• Cash Flow: When does the organisation actually receive or spend the money?

The Assumption Chain

Every financial model depends on assumptions. For example:

Customers à Conversion rate à Transactions à Average revenue à Total revenue à Variable costs à Contribution à Fixed costs  à Profit

The stronger your chain of logic, the easier it is to defend your numbers.

Useful Financial Measures

Depending on the case, you may consider:

• revenue growth;
• gross margin;
• contribution margin;
• operating Profit;
• ROI;
• payback period;
• NPV;
• IRR.

Don't calculate everything. Use the measure that helps answer the decision.

Coach's Lens

I often see teams present a beautifully formatted financial model and then fail to explain what it means.

Don't say: "The project generates an NPV of $4.2 million."

Say: The project creates $4.2 million of value under our base assumptions, but the result becomes unattractive if customer adoption falls below 18%."

Now the financial analysis is helping the decision.

Sensitivity

Identify the assumptions that could materially change the recommendation.

For example:

• adoption;
• pricing;
• market growth;
• customer acquisition cost;
• implementation cost;
• timing.

Test them. You don't need to model everything. Focus on the assumptions that matter most.

Common Mistakes

• Financial Analysis as an Afterthought
• The numbers should influence the strategy.
• Unsupported Assumptions
• Be explicit.
• False Precision
• Don't make uncertain forecasts look certain.
• Ignoring Timing
• A profitable project can still create short-term cash problems.
• Focusing Only on Revenue
• Profit and cash flow often matter more.

Mad Skills Drill

Take your preferred alternative. Build a simple financial model. Identify:

• three revenue assumptions;
• three cost assumptions;
• initial investment;
• expected profit impact;
• payback period or ROI where appropriate.

Then identify the single assumption that matters most. Test it.

Chapter Summary

Financial analysis provides an important reality check. The goal is not to make the most complicated model. It is to determine:

Does the recommendation create enough value to justify the investment and risk?

Key Takeaways

✓ Make assumptions explicit.

✓ Focus on major financial drivers.

✓ Connect revenue, cost, Profit, and cash.

✓ Use the appropriate financial metric.

✓ Test critical assumptions.

✓ Explain the financial implication—not just the calculation.

Looking Ahead

Now we have:

• The customer need.
• The strategic alternatives.
• The decision criteria.
• The financial implications.

The next step is to turn the winning alternative into a coherent strategy.