Prepare a Financial Analysis for an initiative to evaluate the financial investment and expected returns.

A financial analysis is normally required to be prepared for the approval of initiatives expected to deliver operations savings or increased revenue. Certain initiatives, for example compliance-related initiatives, may not require a financial analysis. An updated financial analysis can also be prepared on project completion to assess actual costs and the revised expectations of future benefits.

Key Concepts

• The consistency of financial metrics across all initiatives is achieved by standardising the calculations.

• The Investment Reason for an initiative determines via the scoring model configuration, if, and at what stage, a Financial Analysis is required.

• Financial Analyses are prepared on a monthly period basis, and all durations are provided in months.

• The financial metrics (NPV, Payback Period, IRR) calculated by a Financial Analysis can be automatically incorporated in the benefit score attributable to the initiative.

• The financial impacts of an initiative are recorded in a Gannt chart format to reflect the dependency between activities, and their duration. The is required for net present value calculations.

• The financial metrics calculated within a Financial Analysis are all based on the timing of future cashflows.

• Templates can be used to accelerate the preparation of financial analyses. A default template is assigned to each investment reason in configuration.

• Cashflows are automatically converted to local currency based on the planned exchange rates.

• The discount and taxation rates applied to the future cashflows are derived from the default settings of the company assigned to the benefitting area.

• The financial analysis is comprised of:

  • Project Level attributes including planned Start Date and derived discount, tax and exchange rates (which can be edited by administrators if required)

  • Component Level attributes including Investment (Asset) Class and dependency.

  • Element Level attributes including the CapEx vs OpEx nature of work-breakdown structure element.

  • Activity Level attributes including Duration, Inflow/Outflow, Classification, Internal/External (Supplier/Customer), Quantity (and Units of measure), Unit Value (and Currency), Cashflow profile (including escalations if periodic), Cost Contingency Factor.

• Financial metrics are calculated on an economic cashflow basis. The key difference between CapEx and OpEx is the deferred tax benefit of capital expenditure based on the useful life of the asset (tax shield). To determine the tax shield, a planned depreciation schedule is automatically calculated based on the tax class and useful life of each component. The calculated depreciation and tax impacts of an initiative are displayed in separate tabs of the financial analysis.

• The Fiscal Year tab of the financial analysis presents both the financial accounting and cashflow impacts of the initiative.

• The Gantt Chart of a Financial Analysis can be summarized and expanded at the Component/Element/Activity level.

Instructions

1. On the Option>Benefits or Costs tab of an initiative, if available as per the configuration of the applicable scoring model, click “Add Financial Analysis”.

2. Copy a Template or reference Financial Analysis or Click “New Financial Analysis”. Click the funnel icon to search for a reference template or initiative by name or ID.

3. Update the Project level fields:

   1. Name: by default the financial analysis name is a concatenation of initiative title and option title. you can give template your own description to make it easier to locate for future reference purposes.

   2. Start Date: this is the indicative start date of the initiative and the default start date of all subordinate items. Net Present Value calculations are based on this start date.

   3. Company: this will derive from the Area (if set) and determines the local currency, and applicable discount and tax rates.

   4. Planned Exchange Rates: these are derived from the configuration. Administrators can update these rates on an individual initiative if required.

   5. Exchange Rate Contingency Percentage : to factor unexpected exchange rate variations users can enter an Exchange Contingency percentage. This exchange rate is applied to the group currency translation.

4. Add/Change/Delete Components:

   1. Name: Identify the component with a meaningful description of the target asset e.g. Solar Panels.

   2. Dependency: Relate components together by setting dependencies. The start data of a component will be based on the end date of the dependent component plus or minus any lead/lag time (in months). Note that a positive lead time will add the specified number of months to the start date.

   3. Component Type: Components of Investment type will need to be assigned an investment class and corresponding useful life (derived from configuration). Components of Return type are assumed to be benefit related.

5. Add/Change/Delete Elements:

   1. Name: Components can be broken down into various work-breakdown structure elements and should be named accordingly.

   2. Dependency: Relate elements to each other or Components including lead/lag times.

   3. Element Type: Elements can be:

      1. CapEx: all activity costs accumulate and are depreciated over the useful life of the component

      2. OpEx: all activity costs are immediately expensed/realised

      3. Cash Movements: do not impact accounting returns but do impact net present value calculations and are used to reflect movements in working capital.

6. Add/Change/Delete Activities:

   1. Name: Describe the activity that is incurring the cost or delivering the benefit.

   2. Duration: Activity cashflow can occur over a period (default 1 month) or can be immediate (enter a duration of 0).

   3. Dependency: Relate activities to each other, or elements or Components including lead/lag times.

   4. Activity Type: Specify the direction of cashflow. Investment activities are assumed to be Outflows, and Return activities are assumed to be Inflows. Contrary flows are indicated with a different colour in the Gantt chart.

   5. Specify whether the activity is Internal or External.

      1. For Internal Activities identify:

         1. the Resource Type and Description: this can assist with resource allocation and capacity management.

      2. For External Activities, identify the Partner type (supplier or customer) and Name.

   6. Quantity: Enter the number of items and unit of measure. Eg 5 days.

   7. Unit Value: Enter the amount and currency per unit.

   8. Cashflow Profile:

      1. Start: Cashflow is at the beginning of the activity.

      2. Completion: Cashflow is at the end of the activity.

      3. Linear flow: Cashflow is distributed equally be month between the start and end dates.

      4. Per Period: The amount is incurred at every month. If required, capture periodic increases by frequency. (e.g. assume costs increase by 5% every 12 months).

      5. Manual: Users can manually specify cashflow distributions for the duration of the activity using one of the following input methods:

         • Absolute Values: Enter specific monetary amounts directly into the desired periods.

         • Percentage-Based Entry: Enter a percentage (e.g., "25") to allocate that portion of the total cashflow amount to a given period. The system will automatically calculate and apply the corresponding value. The total amount is to be fully distributed in the duration of the activity.

   9. Cost Contingency Factor: Cost Contingency Factor can be applied to all activities

7. Click Save and Close.

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