Financial Prioritization - Ways to evaluate a cash flow stream?

Financial analysis of themes helps in prioritization because for most organizations the bottom line is the amount of money earned or saved. It is usually sufficient to forecast revenue and operational efficiencies for the next two years. One can always look ahead, however, if necessary.

A good way of modeling the return from a theme is to consider the revenue it will generate from new customers, from current customers buying more copies or additional services, from customers who might have otherwise gone to a competitive product, and from any operational efficiencies it will provide.

Money earned or spent today is worth more than the money earned or spent in future. To compare a current amount with a future amount, the future amount is discounted back into a current amount. The current amount is the amount that could be deposited in a bank or into some other relatively safe investment and that would grow to the future amount by the future time.

What are four ways to evaluate a cash flow stream?

The four good ways to evaluate a cash flow stream are:
- Net present value (NPV) : 
Using this method to prioritize themes has the advantages of being easy to calculate and easy to understand. The primary disadvantage of NPV is that comparing the values of two different cash flow streams can be misleading.

- Internal rate or return (IRR) or Return on Investment :
It provides a way of expressing the return on a project in percentage terms. IRR is the measure of how quickly the money invested in a project will increase in value. Usually, IRR is not used in isloation.
There are couple of disadvantages of IRR. First, The calculation is hard to do by hand, the result may be more subject to distrust be some. Second, IRR cannot be calculated in all situations.

- Payback Period : 
NPV looks at a cash flow stream as a single, present value amount. IRR looks at a cash flow stream as an interest rate. Payback period looks at cash flow stream as amount of time required to earn Back the initial investment.
Two primary advantages of payback period is when comparing and prioritizing themes. First, calculations and interpretations are straight. Second, it measures amount and duration of finacial risk taken on by the organization.
First disadvantage to payback period is that it fails to take into account the time value for money. Second disadvantage is that it is not a measure of the profitability of a project or theme.

- Discounted payback period :
To remedy the first drawback of payback period, simply apply the appropriate discount factor to each item in the cash flow stream

By calculating these values for each theme, the product owner and team can make intelligent decisions about the relative priorities of the themes.

What factors are needed to prioritize themes?

Need of users is considered before planning for a project. To achieve the best combination of product features, schedule, and cost requires deliberate consideration of the cost and value of the user stories and themes.
We need to prioritize and this responsibility is shared among the whole team. Individual user stories or features are aggregated into themes. Stories and themes are then prioritized relative to one another for the purpose of creating a release plan.

There are four primary factors to be considered when prioritizing:
1. The financial value of having the features.
2. The cost of developing new features.
3. The amount and significance of learning and new knowledge created by developing the features.
4. The amount of risk removed by developing features.

1. Determine the Value of Theme
- Estimate the financial impact over a period of time.
- It can be difficult to estimate the financial return on theme.
- It usually involves estimating number of new sales, average value of sales and so on.

2. Determine the Cost of Developing new Features
- Estimating cost of a feature is a huge determinant in overall priority of a feature.
- The best way to reduce the cost of change is to implement a  feature as late as possible.
- The best time to add feature is when there is no more time to change.
- Themes seem worthwhile when viewed in terms of time they will take.
- It is important to keep in mind that time costs money.
- The best way to do this while prioritizing is to do a rough conversion of story points or ideal days into money.

3. Learning New Knowledge
The knowledge that a team develops can be classified in two areas:
Product Knowledge
- It is the knowledge about what will be developed.
- It includes knowledge about features that are included and the features that are not included.
- Better knowledge of product will help the team to make better decisions.

Project Knowledge
- It is the knowledge about how product will be created.
- It includes knowledge about technologies, skills of developers, functioning of team together etc.
- The other side of acquiring knowledge is reducing uncertainty.

4. Risk
- A risk is anything that has not happened yet but might happen. It would threaten or limit the success of the project.
- Types of risks involved in a project are : schedule risk, cost risk and functionality risk.
- Struggle exists between high risk and high-value features of a project.
- Each approach has its drawbacks and the only solution is to give neither risk nor value total supremacy when prioritizing.

All these factors are combined by thinking first of the value and cost of the theme. Doing so will sort the themes into an initial order. Themes can then be moved forward or back in this order based on the other factors.