How to Evaluate Non-Quantifiable Financial Opportunities
By Kapil Kalokhe, Senior Director of Business Advisory Services
Corporate finance professionals are critically evaluated to help the company grow through prudent use of capital. The Chief Financial Officer (CFO) and financial management team are tasked with approving or rejecting operational budgets with little certainty of outcome or based upon quantifiable data. This becomes a challenge for the organization; and a CFO or finance professional who can think creatively can increase their impact during the company’s growth.
Consider the following hypothetical example:
You work in finance at ABC Company that produces a brand name widget. In the span of one month:
- Marketing tells you they want to sponsor an upcoming event and need to invest $100,000
- IT requests $100,000 for a new software that can benefit the data reporting and analytics team
- Sales wants $100,000 to secure incremental shelf space for the next period at one of the large retailers
How do you respond to these requests? What if your manager or company’s budget only has the funds to cover one of these projects? Who gets the money?
Many corporate finance professionals face similar dilemmas and are often challenged to respond. Sometimes it can be the individual / department who screams the loudest or presents the most dire situation receives the funding (eg. “The customer will pull our product if we do not invest”, “Our systems will receive a virus and compromise our data integrity if we do not invest”, “Our consumers will switch to the competing brand if we do not invest”). The finance professional is tasked with presenting an objective opinion often when the request does not have a clear, quantifiable outcome. In addition, these projects do not always generate an immediate return on investment (ROI).
It is necessary to identify key data points or statistics related to each project’s request. In the example above, there are questions to consider for each request.
For the sponsorship ask: How many attendees are expected at the event (eg. potential visitors who would see the brand logo)? How many contacts (attendees, media, suppliers, etc.) are provided by the event’s organizer? How many potential customers will be in attendance? How many brand placements will there be throughout the event? Think about conversion metrics of other advertisements that have been quantified (online media, affiliate campaigns, coupons, referrals, etc.) and use these statistics to create a range of possible outcomes. Applying a conversion metric to the number of attendees and brand placements at the event will calculate estimated revenue expectations.
For the software project: Which internal departments will benefit from the increased information and analytics? What decisions can be impacted from the software? How much time is saved through the use of the software? Using the time savings, calculate hourly rates of employee time to quantify the impact of time spent on other projects and if new software will benefit other departments. Also, inquire about spreading the cost across multiple functions.
For the increased shelf space request: What is the percent increase in total store space? How much traffic is in that location of the store? What type of product was previously in that space? What are the sales of existing product in the store? Comparing the product’s existing sales trends in relation to the shelf space can help gauge whether incremental shelf space would drive significant volume sales lift.
Finance at its core is about trading value today for an uncertain value in the future. The level of uncertainty of the future value and the time period are key drivers to the assessment of the value today. It is this tradeoff that needs to be quantified when faced with an investment decision. Corporate finance professionals should have reporting, models and analytics in place that require minimal effort to update (eg. mostly automated). In addition to the time saved from manually updating these tools, there will be lower risk of human error, which together will ultimately contribute to the company’s growth. Creating tools from non-financial metrics could help non-finance departments think through their decisions more efficiently and reduce the time to implement future strategic projects.
Saggezza’s Business Advisory Service will guide you into becoming a critical financial leader of your organization. Contact our Business Advisory Service managers at email@example.com today.
About the Author
Kapil Kalokhe has spent over 13 years in investment banking and corporate finance. As a finance leader at PepsiCo and Orbitz, Kapil developed processes and analytical models that helped business unit leaders make prudent financial decisions. At Robert W. Baird, Kapil assisted in sell-side M&A transactions totaling over $800M, primarily focused in the consumer and industrial sectors. Kapil has an entrepreneurial mindset and is passionate about helping bring clarity to business performance and improving processes.