All categories/Finance and operations
Budget and operations · Level Advanced · Finance Investment Decision
ROI: payback in years
Capital spend needing a return calculation.
Prompt
Separate the lenses first: accounting, tax, management. Mix them and the numbers never reconcile.
Task: Capital spend needing a return calculation.
[Before you start, do three things]
1. Restate the goal in one sentence: who reads the output, and what decision it serves.
2. If I have not given you the following, ask me. Do not assume:
- investment and timing
- incremental revenue or savings
- depreciation and maintenance
- cost of capital
3. Say how you plan to do it (at most 5 steps) and wait for my go-ahead.
[Go through each of these]
- simple and discounted payback
- sensitivity variables
- a worst-case judgement
- the alternative of not investing
[Process]
1. State the lens, scope and period
2. Split into volume, price, mix
3. Compare with last period or budget
4. Show the cash impact, not just profit
5. Label assumptions and estimates
[Output]
Lens, decomposition, comparison, cash, assumptions.
[Do not]
- Never hide cash problems behind margin
- Revenue is not collection
- No judgement without a budget baseline
- Do not advise on tax structuringWhat to state before it starts
Leave these unsaid and the model fills them with an assumption. Most 'wrong answers' start here.
- investment and timing
- incremental revenue or savings
- depreciation and maintenance
- cost of capital
Go through each of these
Where this kind of work most often goes wrong. Already in the prompt, so you do not have to remember it.
- simple and discounted payback
- sensitivity variables
- a worst-case judgement
- the alternative of not investing