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Financial analysis is used to understand the financial aspects of an investment, a solution, or a solution approach.

Financial analysis is the assessment of the expected financial viability, stability, and benefit realization of an investment option. It includes a consideration of the total cost of the change as well as the
total costs and benefits of using and supporting the solution. Business analysts use financial analysis to make a solution recommendation for an investment in a specific change initiative by comparing
 one solution or solution approach to others, based on analysis of the:
• initial cost and the time frame in which those costs are incurred,
• expected financial benefits and the time frame in which they will be incurred,
• ongoing costs of using the solution and supporting the solution,
• risks associated with the change initiative, and
• ongoing risks to business value of using that solution.


 .1 Cost of the Change The cost of a change includes the expected cost of building or acquiring the solution components and the expected costs of transitioning the enterprise from the current state to the future state. This could include the costs associated with changing equipment and software, facilities, staff and other resources, buying out existing contracts, subsidies, penalties, converting data, training, communicating the change, and managing the roll out. These costs may be shared between organizations within the enterprise.
.2 Total Cost of Ownership (TCO) The total cost of ownership (TCO) is the cost to acquire a solution, the cost of using the solution, and the cost of supporting the solution for the foreseeable future, combined to help understand the potential value of a solution. In the case of equipment and facilities, there is often a generally agreed to life expectancy. However, in the case of processes and software, the life expectancy is often unknown. Some organizations assume a standard time period (for example, three to five years) to understand the costs of ownership of intangibles like processes and software.
 .3 Value Realization Value is typically realized over time. The planned value could be expressed on an annual basis, or could be expressed as a cumulative value over a specific time period.
 .4 Cost-Benefit Analysis Cost-benefit analysis (sometimes called benefit-cost analysis) is a prediction of the expected total benefits minus the expected total costs, resulting in an expected net benefit (the planned business value). Assumptions about the factors that make up the costs and benefits should be clearly stated in the calculations so they can be reviewed, challenged and





Return on Investment The return on investment (ROI) of a planned change is expressed as a percentage measuring the net benefits divided by the cost of the change.
One change initiative, solution, or solution approach may be compared to that of others to determine which one provides the greater overall return relative to the amount of the investment.
The formula to calculate ROI is: Return on Investment = (Total Benefits – Cost of the Investment) / Cost of the Investment. The higher the ROI, the better the investment.
When making a comparison between potential investments, the business analyst should use the same time period for both.

Payback Period The payback period provides a projection on the time period required to generate enough benefits to recover the cost of the change, irrespective of the discount rate.
Once the payback period has passed the initiative would normally show a net financial benefit to the organization, unless operating costs rise.
There is no standard formula for calculating the payback period. The time period is usually expressed in years or years and months.


 

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