/financial-analysis

name: financial-analysis
description: Run ROI, IRR, NPV, payback period, and cost-benefit analysis for product investments. Use when you need to quantify the financial case for building something.

Financial Analysis

Quantify the financial case for a product investment using the methods finance teams and executives actually use — ROI, IRR, NPV, payback period, and cost-benefit analysis. Claude runs the models and sensitivity analysis. You provide the assumptions and defend the numbers.

When to Use

• Leadership wants to know the ROI of a proposed initiative
• You're competing for budget against other teams' proposals
• Finance requires a business case before approving headcount or spend
• You need to compare two investment options on a financial basis
• Quarterly or annual planning requires investment justification
• A build-vs-buy decision needs financial modeling beyond TCO

When NOT to Use

• You're comparing build vs. buy holistically (not just financially) — use Build vs. Buy
• You need to set pricing — use Pricing & Packaging
• You're communicating tech debt cost — use Tech Debt Communication (though it may reference this skill)

The AI-Native Approach

| Step | Time | Claude Does | You Do | |---|---|---|---| | Define the investment | 15 min | Structure costs, timeline, and assumptions | Provide estimates, validate with finance/engineering | | Model the returns | 20 min | Calculate revenue impact, cost savings, risk reduction | Validate assumptions about adoption, conversion, retention | | Run financial metrics | 15 min | Calculate ROI, IRR, NPV, payback period | Choose discount rate and time horizon with finance | | Sensitivity analysis | 15 min | Model best/base/worst scenarios, identify key variables | Decide which assumptions to stress-test | | Build the case | 15 min | Draft investment summary for leadership/finance | Review numbers, add strategic context |

Process

Step 1: Define the Investment (15 minutes)

I need to build a financial case for [initiative].

Investment costs:
- Development: [engineering headcount × duration, or contractor cost]
- Design: [design resources needed]
- Infrastructure: [hosting, tooling, third-party services]
- Opportunity cost: [what the team can't build while building this]
- Ongoing maintenance: [annual cost to keep it running — typically 15-20% of build cost]
- Other: [training, migration, change management]

Timeline:
- Build duration: [weeks/months]
- Time to first value: [when does the investment start generating returns?]
- Full value realization: [when does it reach steady-state impact?]
- Analysis horizon: [1 year / 2 years / 3 years / 5 years]

Help me structure all costs into a year-by-year cash flow model.
Distinguish between one-time costs and recurring costs.

Step 2: Model the Returns (20 minutes)

This is where most financial cases are won or lost — the quality of your return assumptions.

Model the financial returns for this investment:

Revenue impact:
- New revenue: [new customers, upsells, or expansion enabled by this]
  - Estimated new ARR: [amount] with [adoption rate] assumption
- Revenue retention: [churn prevented, renewals saved]
  - At-risk ARR: [amount] with [save rate] assumption
- Revenue acceleration: [faster sales cycles, higher conversion rates]
  - Current conversion: [rate] → projected: [rate]

Cost savings:
- Operational efficiency: [manual work eliminated, headcount avoided]
  - Hours saved per [week/month]: [amount] × loaded cost per hour
- Infrastructure savings: [reduced hosting, vendor consolidation]
- Support cost reduction: [ticket volume reduction, faster resolution]

Risk reduction (quantify where possible):
- Compliance: [cost of non-compliance × probability]
- Security: [breach cost × probability reduction]
- Technical: [outage cost × frequency reduction]

For each return:
- What's the assumption behind this number?
- How confident are we? (high / medium / low)
- When does this return start? (month/quarter after launch)
- Does it grow over time or stay flat?

Step 3: Run Financial Metrics (15 minutes)

Calculate the following financial metrics from the cash flow model:

1. ROI (Return on Investment):
   Formula: (Net returns - Total investment) / Total investment × 100
   Calculate for: 1-year, 2-year, 3-year horizons
   
2. NPV (Net Present Value):
   Discount rate: [company's WACC or hurdle rate — typically 8-15%]
   Calculate the present value of all future cash flows minus the initial investment
   Interpretation: positive NPV = investment creates value

3. IRR (Internal Rate of Return):
   The discount rate that makes NPV = 0
   Interpretation: if IRR > hurdle rate, the investment is financially justified

4. Payback Period:
   How many months until cumulative returns exceed cumulative investment
   Both simple payback and discounted payback

5. Cost-Benefit Ratio:
   Total discounted benefits / Total discounted costs
   Interpretation: ratio > 1.0 = benefits exceed costs

Present as a summary table with all five metrics.
Include the year-by-year cash flow model showing investment, returns, cumulative, and discounted values.

Step 4: Sensitivity Analysis (15 minutes)

Every financial model is only as good as its assumptions. Show what happens when they're wrong.

Run sensitivity analysis on the financial model:

Three scenarios:
- Best case: [optimistic but defensible assumptions]
- Base case: [most likely assumptions — use this as the primary case]
- Worst case: [pessimistic but plausible assumptions]

For each scenario, recalculate: ROI, NPV, IRR, payback period

Key variable sensitivity:
For each critical assumption, show the impact of ±20% variance:
- Adoption rate: what if 20% higher / lower?
- Development timeline: what if it takes 50% longer?
- Revenue per customer: what if 20% higher / lower?
- Churn impact: what if save rate is 20% higher / lower?

Identify:
- Break-even assumptions: at what point does NPV go negative