BTFB Module 2

Business Transformation:
Phase 2
Finance Module
Business Transformation Workshop
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Knowledge Training LLC
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intellectual property rights of third parties, including Cisco Systems,
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© 2012 Global Knowledge Training LLC. All rights reserved 12/3/2013 Page 2
Business Transformation:
An Architectural Approach
Phase 2 Objectives
After completing this phase of the program, you will be

able to:
 Understand fundamental financial terminology and

concepts
 Read and interpret financial documents
 Understand the basis for evaluating investment
decisions
 Understand how to use financial concepts in the
creation of a business case.
Agenda
Module 1
Introduction
Funding models for business operations
The Income Statement
Module 2
Budget and Forecast

Investment Appraisal
How to use Financial terms in your role
Agenda
Module 3
How to use financial terms in a business case

Create a business case
Recap
Unit 1
FinCo
Return on
Capital is
Assets $100m
7%
Equity
$99m
Debt
Profit $7m
$1m
Economic Profit
COST OF ECONOMIC
PROFIT
CAPITAL PROFIT
How a CFO Budgets
What is a budget?
REVENUE COSTS
ONE YEAR
TOP DOWN or BOTTOM UP
Challenge
BOARD
ACHIEVE
CFO
DEPARTMENT
HEAD
INCREMENTAL OR ZERO BASED
USE IT OR LOSE IT
How to Build a Budget
2013 Budget 2012 Actual
Sales 20,000,000
Cost of Sales -1,000,000
Gross Profit 19,000,000
Operating Expenses
Premises 800,000
Professional 690,000
Salaries 2,000,000
Advertising 400,000
Telephone 500,000
Subscriptions 100,000
Travel 2,000,000
Miscellaneous
TOTAL 6,490,000
Operating Profit 12,510,000
Discussion
What areas of the budget could your solution affect?
Understanding Forecasts
Year 1 Year 2 Year 3 Year 4 Year 5
FORECAST
Actions
BUDGET ACTUAL MONTHLY
One year Plan Forecast Profit

Revenue Loss
Costs
Guidance
Building a Forecast
Q1 Q2 Q3 Q4
budget budget budget budget
Q1 Q2 Q3 Q4
Actual budget budget budget
Q1 Q2 Q3 Q4
Actual Actual budget budget
Q1 Q2 Q3 Q4
Actual Actual Actual budget
Investment Appraisal
Discussion Investment Appraisal
 Why do companies need to appraise investments?

 Under what circumstances are investments
considered?
Financial Business Case Process
Build Cash Requires Solution Cost and

Flow Model Financial Benefit
Create
Discounted Hurdle or Discount
Requires
Cash Flow Rate
Model
Establish Total
Cost of Requires CapEx and OpEx
Ownership Savings
Create
Business
Case
Building a Cash Flow Model
Building Cash Flow Models
YEAR YEARLY CASH  A new collaboration

FLOWS
architecture will save
$ FinCo $1m a year
over their existing
0 3,000,000
systems.
1 1,000,000  In 5 years a new
solution will be
2 1,000,000 required
 Initial Investment will
3 1,000,000
be £3m
4 1,000,000
5 1,000,000
Cash Surplus 2,000,000
Time Value of Money
Time Value of Money
Compounding 3 years at 10%
$100 10% $110

$110 10% $121
$121 10% $133
Compounding Formula
FUTURE VALUE = PRESENT VALUE x (1 + i)n
i = Interest Rate as a decimal

n = Number of Years
Discounting
Discounting – 3 years at 10%
$100 10% $90

$90 10% $81
$81 10% $73
Compounding Formula
PRESENT VALUE = FUTURE VALUE / (1 + i)n
i = Interest Rate as a decimal

n = Number of Years
Discussion – Present Value
What is the present value of $2938 in 5 years time

using a discount rate of 8%?
Discussion
What implications do compounding and discounting

have on your business case?
Net Present Value
Discount or Hurdle Rate
Discount or Hurdle Rate
Cost of Debt Cost of Equity Investor Returns
Building Discount Cash Flow Models
YEAR YEARLY CASH

FLOWS
 A new
$
collaboration
architecture will
0 3,000,000 save FinCo $1m
1 1,000,000 a year
 In 5 years a new
2 1,000,000
solution will be
3 1,000,000 required
4 1,000,000
 Initial Investment
will be £3m
5 1,000,000
 Discount rate of
Cash Surplus 2,000,000 10%
YEAR YEARLY CASH

FLOWS
 A new
$
collaboration
architecture will
0 3,000,000 save FinCo $1m
1 910,000 a year.
2 820,000
solution will be
3 750,000 required
4 680,000
will be £3m
5 620,000
Cash Surplus 780,000 10%
YEAR YEARLY CASH

FLOWS
$
0 3,000,000
1 910,000
2 820,000
3 750,000
Payback
4 680,000 period is
5 620,000
4 years
Cash Surplus 780,000
Discounted Cash Flow FinCo
Collaboration Architecture
-$3m $1m $1m $1m $1m $1m

$0.91 1.1
$0.82
1.12
$0.75
1.13
$0.68
1.14
1.15
$0.62
$3.78m Net Present Value

Exercise FinCo Collaboration Architecture
20% Discount Rate
-$3m $1m $1m $1m $1m $1m

$? ?
$?
?2
$?
?3
$?
?4
?5
$?
$?m Net Present Value

DCF for FinCo Collaboration Architecture
-$3m $1m $1m $1m $1m $1m

$0.83 1.2
$0.69
1.22
$0.57
1.23
$0.48
1.24
1.25
$0.40
$2.97m Net Present Value

YEAR YEARLY CASH

FLOWS
 A new
$
collaboration
architecture will
0 3,000,000 save FinCo $1m a
1 830,000 year
2 690,000
solution will be
3 570,000 required
4 480,000
will be £3m
5 400,000
Cash Surplus -30,000 20%
Discussion- Internal Rate of Return
At what percentage point would this project break

even?
This percentage point is the Internal Rate of Return.
The hurdle rate is the percentage cost of capital
and is a combination of the cost of borrowing, time
and saving.
Internal Rate of Return vs Hurdle or
Discount Rate
At what percentage point would this project break
even?
Hurdle Rate
Hurdle Rate
IRR
IRR
Discussion - Sensitivity
All cash flow models can be affected depending on

variables.
What are some of those variables?
Total Cost of Ownership
TCO – Total Cost of Ownership
“TCO - assesses both direct and

indirect costs and benefits related to
the purchase of any IT component”
TCO – Categories
Hardware & Software Operations Long Term
Network Physical Infrastructure Replacement
Server Energy Upgrade expenses
Workstation Failures Decommissioning
Installation Efficiency
Integration Backup and DR
License People
Migration Insurance
Discussion- Gathering Data
Who would I talk to to gather the information I need?

What methods could I use?
TCO – 5 year Comparison
7
6
5
4
3
2
1
0 Status Quo
Architecture Status Quo
OpEx 2 4.5
CapEx 3 1.5
Architecture
0 2 4 6
Network Servers Workstations
Bringing it all together
Bringing it all together
Metric Proposed Architecture
Total Cost of Architecture $3,000,000
Total Projected Savings Over 5 $5,000,000

years
Return on Investment 60%
Internal Rate of Return - IRR 19% (+9% of Hurdle Rate)
Net Present Value - NPV $3,780,000
Payback Period - Months 44
Benefits and Savings $4,000,000
TCO Savings $1,000,000
Module Recap
Q and A
Module 2 Outcomes
 Explain how discounting and compounding impacts propositions

 Apply the concept of Hurdle Rate and Internal Rate of Return
 Articulate the budget and forecast process

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Business Transformation:

Copyright ©2012 and Distribution Rights Held by Global

This courseware may contain trademarks, copyrights and other

After completing this phase of the program, you will be

 Understand fundamental financial terminology and

Budget and Forecast

How to use financial terms in a business case

Gross Profit 19,000,000

Operating Profit 12,510,000

What areas of the budget could your solution affect?

Year 1 Year 2 Year 3 Year 4 Year 5

One year Plan Forecast Profit

 Why do companies need to appraise investments?

Build Cash Requires Solution Cost and

YEAR YEARLY CASH  A new collaboration

Cash Surplus 2,000,000

$100 10% $110

FUTURE VALUE = PRESENT VALUE x (1 + i)n

i = Interest Rate as a decimal

$100 10% $90

PRESENT VALUE = FUTURE VALUE / (1 + i)n

i = Interest Rate as a decimal

What is the present value of $2938 in 5 years time

What implications do compounding and discounting

Discount or Hurdle Rate

Cost of Debt Cost of Equity Investor Returns

YEAR YEARLY CASH

YEAR YEARLY CASH

YEAR YEARLY CASH

Cash Surplus 780,000

-$3m $1m $1m $1m $1m $1m

$3.78m Net Present Value

-$3m $1m $1m $1m $1m $1m

$?m Net Present Value

-$3m $1m $1m $1m $1m $1m

$2.97m Net Present Value

YEAR YEARLY CASH

At what percentage point would this project break

All cash flow models can be affected depending on

What are some of those variables?

“TCO - assesses both direct and

Hardware & Software Operations Long Term

Network Physical Infrastructure Replacement

Server Energy Upgrade expenses

Workstation Failures Decommissioning

Integration Backup and DR

Who would I talk to to gather the information I need?

Metric Proposed Architecture

Total Cost of Architecture $3,000,000

Total Projected Savings Over 5 $5,000,000

Internal Rate of Return - IRR 19% (+9% of Hurdle Rate)

Net Present Value - NPV $3,780,000

Payback Period - Months 44

Benefits and Savings $4,000,000

TCO Savings $1,000,000

 Explain how discounting and compounding impacts propositions

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