Fund Your Project with Financial Measures
Position your project as a money maker in order to sell it to top management.
In June's Business Basics column we looked at a loan proposition: Would it be smarter to loan someone $1,000 (which would pay $1,040 in a year) or invest that $1,000 in a 3 percent CD for a year?
We looked at the trade-off from four perspectives: How much money you'll have a year from now; a comparison of the earnings as well as interest rates (we compared the Internal Rate of Return (IRR) of the loan to the CD's interest rate); the value today of the money you'll have next year (the present value, or PV for short); and how much more (or less) you'll earn by making the loan (the net present value, or NPV).
Though each perspective leads to the same conclusion, which one you use depends on the comfort level of your audience. This month I'll explore why these measures don't tell the full story, how to make them more effective and how to present them to management. I'll also reveal one of the most powerful approaches to using these numbers.
You May Not Need It
Some projects don't need to be formally approved. When I managed a payroll system, software changes to handle year-end reporting (including those all-important W2s) and next year's tax laws were automatically approved.
In your organization, officials may decide that they must implement a new technology to stay competitive (or move ahead), so it's "damn the cost, full speed ahead."
If you're in the enviable position of having your project funded, congratulations. The rest of us must learn to use IRR, PV, NPV and the time value of money to our advantage.
Good But Not Perfect
As good as PV, NPV and IRR are, they aren't enough to put your project proposal in the best light. Relying on any one of them too much could lead you into several traps.
A project's scale is not always immediately evident. Imagine that your project offers an ROI of only five percent. My project pitch promises an ROI of 20 percent. Which will the Executive Committee approve? Seems like an easy choice, right?
However, what if you knew your project requires an investment of $10,000 while mine requires an initial outlay of $2 million? Now which of us is likely to come away with an approved project?
They don't describe a project's duration. Suppose both of our projects offer the same rate of return for the same initial investment. If you only use any of the four perspectives I've described, you miss the opportunity to explain to the approval committee that your project's payback period is six months, while mine is two years. Committees often focus on the short term, so your project will be favored.
The risks aren't always clear. Now suppose our projects offer the same ROI for the same investment and will finish at the same time. Your project requires a system update from a sometimes-unreliable vendor. My project implements an established technology that has been successfully installed at dozens of companies. Even the time value of money, IRR, PV or NPV can't convey a project's risk.
How to Boost Those Numbers
Though they won't tell you outright, members of your Executive Committee have their own biases and concerns. Here's how to incorporate financial measurements in your project proposals to overcome some of those problems and use the numbers to your advantage.
Boost #1: Quantify everything.
There are some slippery slopes when calculating costs and benefits. Avoid vague terms such as "improved morale;" instead, put into numbers the benefits you may reasonably expecteven if such calculations may be estimates. For example, better morale may result in improved productivity, thereby reducing overtime hours. At an average hourly rate of $X (don't forget to add overhead, such as an acceptable percentage for benefits), you can present a financial benefit.
Boost #2: Factor in all gains.
If your project's investments are all made at the outset, your calculations will certainly be much easier. However, if costs are spread out over several months (or even years), your ROI calculation will be much more complex. You'll likewise face additional complexity if a project returns some measurable benefits while it's in progress. Rather than wait for the benefits to begin flowing on completion of the project, incorporate phase-end savings.
Invest the time calculating an ROI that most accurately reflects the time value of money; payments later in the project (rather than up-front) will raise your ROI (or lower your IRR). Your ROI will also improve if you can show intermediate benefits.
If there are tax implications to your proposal, talk to your accounting department to find out how these can be measured.
Boost #3: Explain all risks.
Within your project proposal you'll want to discuss the chances for success. While you must not downplay the risks, you can spell out the conditions under which your project might not be successful. Let your manager evaluate the risks.
Trying to assign a numeric value to account for the risk can be extremely tricky. Whatever you do, don't provide several possible ROIs based on different scenarios. You'll only muddy the waters. Let management evaluate the risks, determine their weight, and factor risk into their decision.
Presenting Your Numbers
Armed with the best possible numbers, you're ready to make your presentation. Here's how to use those numbers to your best advantage:
1. Maximize the positives.
Pick the measures that make your project stand out strongly from the projects competing for the same funds. Compare its ROI or IRR with previously successful projects. For example, if your project has a shorter payback period, emphasize that fact (we all like to get money more quickly).
2. Use more than one metric.
If your manager has to pick between two projects, look for the measurements that are easily distinguishable and easy to sell: Quicker payback, smaller initial investment, mid-project benefits, and so on.
3. Use the right metrics.
Managers love numbers because they make comparisons easier. By all means, use ROI and IRR if you're speaking to upper management or the CFO, but find out which method is the most trusted in your organization. Yes, all the measures return the same answer. It's a matter of preference. Ask around. Project managers whose projects received funding are an excellent source.
4. Overcome management fear.
You're familiar with the FUD factor (fear, uncertainty and doubt). Management may be concerned that a better project will come along while their money is tied up in your project. Once spent on your project, management can't get the money back.
Counter FUD with the benefits to customers, the company, or your department this project offers. Make sure you show how your project supports the goals of the organization, be it customer satisfaction, internal productivity improvements, or inventory management. Show you're part of the team.
The Best Approach
The best advice I can offer is to change your mindset when you make your presentation. Don't ask for moneyoffer it.
Position your project as a money maker, not as a drain on resources. Use positive ROI and a strong IRR as backup to your main message: You're offering management a new (or improved) income stream.
Underplay the investment aspect of your project; instead, emphasize the returns. We all like to know how much we're going to make or savecost can then become a secondary consideration.
Too often a proposal to management emphasizes cost justification. Instead, turn the situation aroundsell the benefits. Focus on the customer, not competing projects. Explain how reducing costs contributes to bottom-line revenue just as much as increased sales do.
Think like the company's brass. Show how your project supports the organization's strategic vision, and show why the company's money shouldn't be stored under its corporate mattress.