Alice Pugh explains the importance of having financial, commercial and managerial cases when raising a business case.
This blog was first posted by the National Civic Impact Accelerator, based at Sheffield Hallam University. They are part of a series looking at what a business case is and how to develop one at a University. Visit our page to read the first and second blogs in the Business Case series.
Financial Case
The purpose of the financial case within the business case is to demonstrate the affordability and funding of the preferred option, including the support of stakeholders as required.
Demonstrating the affordability and fundability of the preferred option requires a complete understanding of the capital, revenue and whole-life costs of the scheme. Alongside, how the anticipated deal will impact the balance sheet, income, expenditure and pricing arrangements (if any) of the organisation.
Whilst this may sound similar to the economic case, it only covers affordability and fundability whereas, the economic dimension assesses whether the proposal delivers the best value to wider society. The financial case is exclusively concerned with the financial impact on the public sector.
Financial Appraisal Process
The financial case requires that the key following questions be answered:
- Does the scheme need a financial model? For large, significant and/or complex schemes, a financial model of the proposed expenditure will be required. To ensure reliability and robustness the model will need to be continually reviewed and updated, the oversight of an external specialist (e.g., accountant or financial advisor) may be preferential.
- What are the capital and revenue spending requirements for the scheme? A statement showing the necessary capital and revenue spending requirements for the scheme should be prepared. It should highlight the capital and revenue consequences of the preferred option for the lifespan of the service and/or contract period.
- What is the impact on the income and expenditure account, as well as the organisation’s charges for services? Any impact on the organisation’s income and expenditure will need to be assessed. Additionally, it may also be necessary to assess the impact of the proposal on any contract prices that the organisation charges for its services, all costs should be covered by income year by year.
- Are there any shortfalls in funding? Any shortfalls in funding must also be highlighted, as this is extremely important for proving affordability and fundability.
- What is the impact on the balance sheet? The impact of the scheme on the organisation’s balance sheet must be assessed. Both the current position and the likely outcome should be assessed by a qualified accountant. If significant assets are an integral part of investment, accounting treatment will need to be examined, preferably by an independent auditor.
- Is evidence of commissioner or stakeholder support necessary? Where necessary, particularly for large, significant or complex schemes, it may be necessary to provide evidence of stakeholder or commissioner support. Particularly if there are additional funders involved, an agreement in principle will need to be provided to evidence that the scheme is affordable and fundable.
Commercial Case
The commercial case within the business case demonstrates the commercial strategy and arrangements relating to the services and assets required by the proposal and to design procurement tenders where one is required.
Demonstrating a viable procurement requires an understanding of the marketplace, knowledge of what is realistically achievable by the supply side and research into the procurement routes which deliver the best value to all participating parties.
The challenge for the business case author is to be an ‘intelligent customer’ and to anticipate from the outset how the best public value can be secured during the contract phase, in the face of inevitable changes to business, organisational and operational requirements.
It should be noted that the commercial stage is not only fed by the strategic and economic cases, but it also feeds cost risk management and timings back into the economic and financial cases of the business case process. The commercial case needs to be considered from the start when investigating the long list of options for the scheme.
Procurement Process
The commercial case requires that the following key questions be answered:
- What procurement strategy should be used? This requires considering how the services, supplies or works can best be procured per current guidance and regulations, alongside the pre-existing commercial strategy of the organisation.
- What are the main service streams and required outputs? The preferred options service streams and required outputs need to be determined, alongside the content of the potential deal developed with all service providers.
- What is the risk apportionment? The main aim when answering this question is to ensure that specific risks are allocated to the best party equipped to manage them, subject to the risk premium. With the intention of optimising the allocation and sharing of risk rather than maximising the number of risks transferable to service providers in delivery.
- What are the potential payment mechanisms? Here you should identify how the service providers will be paid for the delivery of key services and outputs over the expected lifespan of the contract. It is key to consider how best to incentivise providers to provide value for money over the lifespan of the project and its operational phase. This will help the organisation to deal with potential change and risks more effectively.
- What are the contractual arrangements? The contractual agreements then need to be outlined for the project, including the use of the particular contracts, key contractual issues, any accountancy treatment and personnel implications (if any).
Management Case
The final case within the business case is the management case, for which the purpose is to demonstrate the practical and robust arrangements in place for the delivery, monitoring, and evaluation of the scheme.
The case needs to outline how the preferred option will be successfully delivered, with supporting evidence that the scheme will be managed in accordance with best practice, subjected to independent assurance and that necessary arrangements are in place for change and contract management, benefit realisation and risk management.
Arrangements for monitoring and evaluation before, during and after implementation need to be provided. This includes who will be responsible for delivering outputs, what agreed milestones are to be achieved and when delivery is to be completed.
Management Process
The management case requires that the following questions must be answered:
- What is the project management plan? The strategy, framework and plans for successful project delivery using a proven methodology for guiding investments through a controlled, professionally managed and visible set of activities to achieve the desired results and benefits, needs to be put in place. Evidence must be provided that these arrangements are in place.
- What is the change management strategy? A strategy, framework and plan will need to be implemented to manage change. It is anticipated that investment will lead to change within the organisation whether organisational, commercial, or structural change etc., and this change will need to be managed and embraced. Therefore, the change management strategy will need to assess the potential impact of the proposed change on the culture, systems, processes, and people working within the organisation, to ensure benefits are fully realised.
- What is the benefit realisation strategy? This strategy should set out arrangements for the identification of potential benefits, their planning, modelling, and tracking. Including a framework to assign responsibilities for benefit realisation throughout the key stages of the scheme.
- What are the risk management arrangements? Arrangements must be put in place to manage and mitigate risks during the key stages of the project. A structured approach must be developed to identify, assess, and control risks that may emerge during the project lifecycle. This should support better decision-making, through understanding the inherent risks in a proposal and their likely impact.
- What are the arrangements for assurance, monitoring, and evaluation? An assurance, monitoring and evaluation plan needs to be developed for the preferred option, to ensure that a true understanding of the impact of the preferred option can be developed. This is important for ensuring the successful implementation and the responsible, transparent management of public resources.
This blog was written by Alice Pugh, Policy and Data Analyst City-REDI / WMREDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the author and not necessarily those of City-REDI / WMREDI or the University of Birmingham.