A New Method for Assessing Circular Business Cases

The circular economy is a key enabler for businesses to achieve sustainability targets. However, traditional financial analysis models can be inadequate for evaluating circular business models. While circularity helps reduce waste, recover materials, and extend product lifespans, it also fundamentally changes how value is created and measured. Yet, most financial models remain rooted in linear assumptions — where profitability is assessed through onetime product sales and predictable cost structures.

This misalignment creates significant risks. Circular businesses generate revenue across multiple life cycles — through leasing, refurbishment, resale, and material recovery — but linear analysis overlooks these ongoing value streams. Additionally, cash-flow timing, revenue recognition, and asset management complexities must be restructured to ensure financial viability. These analytical gaps can lead to undervaluing circular investments, misjudging payback periods, and deterring financially viable circular strategies.

To make circular business models financially competitive, executives need new approaches to financial analysis — ones that capture multi-life-cycle revenue, asset utilization, and residual material value. This article introduces practical financial considerations tailored for circular models in order to equip leaders with rigorous methods to assess profitability, risk, and long-term financial performance.

Why Circular Models Defy Conventional Analyses

While circularity is often seen as a sustainability lever, its commercial potential and financial implications are just as significant. Unlike linear models, where financial analysis ends with a single transaction, circular business models generate value across multiple life cycles, requiring a fundamental shift in how profitability is measured. (See “How Revenues and Costs Differ for Direct and Circular Business Models.”) This shift introduces several unique financial challenges:

• Higher product and infrastructure costs hitting the bottom line. Designing for circularity — such as using durable and recyclable materials or considering modularity and disassembly — raises cost of goods sold (COGS). While innovation can bring costs down, the need for higher-quality materials or complex manufacturing processes would inevitably be costlier compared with linear equivalents. Likewise, establishing reverse logistics systems for tracking, recovering, and processing used products demands significant capital. For example, while reusing toner bottles has saved Ricoh money compared with paying for virgin bottles, the process of recovering bottles after use accounted for over 60% of their cost as of 2022.1
• Revenue cannibalization threatening top-line growth. Extending product lifespans means that customers might purchase fewer new products.