What is a cost-benefit analysis?
When making business decisions, a cost-benefit analysis often helps to quantify the factors involved. Not unlike a pro-con list, the cost-benefit analysis tries to put a financial value of each factor to help you decide on the economies involved in any dilemma. After all, the ultimate goal of any business is to generate the largest possible profit from revenue.
The flexibility of cost-benefit analyses mean that they can (and probably should) be applied to all business projects. In this way businesses have a good understanding of the costs involved with the project balanced against the expected benefits. Where the cost outweighs the benefit, the project probably should not be started.
Perhaps even more usefully, a cost-benefit analysis can be used to decide the correct approach to a business challenge. Where there is more than one way to proceed, breaking down the costs and benefits for each will help to identify the most profitable or cost-effective.
The specific factors to consider will vary according to the project, but basic inclusions will be things like:
- Cost of materials
- Cost of project completion in terms of man-hours
- Projected efficiency and cost savings
- Reductions in future resource usage
By subtracting the costs from the revenue generated by the project, your business will have a general figure to consider. The greater the positive value, the more compelling the case for proceeding. Conversely a negative value will identify a project or approach that is best not pursued.
You should always bear in mind that a cost-benefit analysis is a simplification and may involve many estimates that mean the final values are not completely accurate.
