These cash flows are based on the ‘physical’ flows inside the business, whether manufacturing or information technology. It becomes visual like being in a helicopter above.

Each evaluation model can quickly sort all its data into:
Cash Stream 1: Revenue– which is derived from sales and price.
Cash Stream 2: Operating Costs or Expenses– which are derived from production and operations.
Cash stream 3: Capital Costs– construction and on-going
Cash Stream 4: Royalties and Taxes– as are paid out in cash using government legislation on deductions for capital expenditure (and not accounting depreciation)
Net Cashflow – these four are summed to give the total cash in/cash out each year or month.

There are no other money flows outside these four.

• Sunk costs are excluded (but may be included in the countries legislated deductions for capital expenditure)
• Working capital usually is included in cash stream 2: operating costs and perhaps cash stream 3.
• Tax is included when it is paid in cash not when it becomes liable.

Adopting these four cash streams makes modelling so much easier and transparent than the old-fashioned convoluted modelling. Anyone can readily ‘see’ the business inside the evaluation model and immediately understand everything!

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The evaluation models later can have the Financing added. A separate worksheet would take key information from the four cash streams and add debt and equity. (This is a one-way flow of data as data should not flow back to the four cash streams.)

Likewise, the economic evaluation model can have an accounting worksheet added that takes key data from the four cash streams and from the financing worksheets to generate the usual accounting results.

Eyes Wide Open
The key philosophy of this website on economic evaluation is that all available information is assessed and sorted to create an easy-to-understand economic model. This model uses rigorous modelling practices (that themselves are easy-to-learn) and so becomes transparent and intuitive and high in confidence. It gives a helicopter view. Key people can make the final decision with “their eyes wide open”.

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• NPV – net present value
• IRR – internal rate of return
• Payback
• Return on investment.
• Risked weighted valuations.

(Except for very special situations, these are after taxes and royalties)

These metrics are only the very start of the process. They are not the main output from the modelling. Each evaluation model yields far more awareness and is much broader and deeper than these simple metrics.
Selecting the final option is much, much more than finding the highest NPV and/or highest IRR. As this website explains, these are just two considerations inside a big basket of evaluation concepts.

The economic evaluation / financial modelling process should produce a range of spreadsheet models of the business or project so that all configurations and all scenarios can be fully assessed and compared. These may need to be risk weighted. Many cases might be eliminated in the early stages of assessment and only a few caried through to full evaluation in Level 2.

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This website targets:

1. engineers, scientists, marketing specialists, product experts, technology professionals and supervisors of existing production operations.
2. community project managers in social enterprises or in an NGO starting up a self-funding project

The Home Page gives the options of two parallel streams:

1. business assessments and
2. social enterprise assessments and self-funding community projects

No special expertise is needed. Take it easy and teach yourself at your own pace.

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• Existing Businesses – Assessing the economics, viability and value of an existing business – small or mammoth, as it stands now or with the development of options.
• New Project or Concept Study – Assessing the economics, viabilty and value of a new project. As in social enterprises and community start-ups
• Merger & Acquisitions (M&A) – Evaluating each of the underlying entities then assessing the compatibility, synergies, benefits, viability, optionality and value of a merger.
• Investments – assessing and valuing an investment in an existing business or in a new project
• New Products and Sales – evaluating the viability and value of a new product and/or of various sales plans.
• Operating plant improvements and new ideas for manufacturing
• Optimisation – assessing the full range of possibilities for an existing business or a new project.
• Closure – Compare and value different ways of closing down an existing business.

The post When to use economic evaluation / financial modelling in business and social enterprises? appeared first on Economic evaluation.

Level 1. Simple Concept study
Level 2. Comparing Alternatives – applying risk weightings where appropriate.
Level 3. Optimising the Selected Option

Each model presents an almost ‘visual’ assessment of that business case or of that project case.

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