What is cost benefit analysis: Understanding the simple cost-benefit logic for decision making in business
Business managers and executives make decisions every day. Sometimes those decisions can be both irrational and rational. Every decision has an impact on your business. It doesn’t matter how small it is because it will impact your business some way or the other. It is quite necessary to calculate the benefits and cost of certain decisions before you make them.
What you can use to help make life easier for you is to practice cost-benefit analysis. Cost-benefit analysis is when you analyze the cost and benefits of different options to make proper business decisions. These decisions can stem from upcoming projects, product launch, marketing etc.
In the business community, a strategy like this will help to shed off some of the uncertainty that comes with certain projects. It can be used anytime within a certain project whether at the beginning, middle and end. It’s all up to your preferences.
There are 5 basic steps you need to take when performing cost-benefit analysis:
The first step you have to take is to identify all the options that are on the table when making a decision. Look at the problems you are currently facing in a certain situation. You can then list out all the possible options that you could take to solve it.
Evaluate the impacts of each option
You are then going to evaluate and discuss how impactful each option can be if it is chosen. You are next going to measure the different options and choose the best ones you think can have the most impact.
Measure the cost and benefit
After you have finished with those two steps. You are now going to measure the cost and benefits of each of the best options you have chosen. It would be great if you could trim that list down to 3-5 options. This will make it much easier to compare and choose the best option for the last step.
Compare and choose
You are now going to compare and choose the best option. Make sure that the option saves cost and have the biggest upside benefit to your organization.
The steps shown above will help you to choose which is the best option to pursue. Calculating the cost is quite easier than the benefits.
With the cost you can calculate labor, tools and equipment etc. and then speculate the project ROI or return on investment.
When it comes on to measuring the benefits, it’s highly speculative because so many things can happen. What you can do is to manage and track the project’s process to ensure that it goes according to plan. If it doesn’t go according to plan, that’s okay because you can always tweak it as you go along. To try and eliminate some of the risk that comes with each decision. You can implement risk management techniques and strategies to keep certain processes under control.
This will also blend in well with the cost-benefit analysis structure as well. Overall, cost-benefit analysis can be a useful tool you can use to make business decisions before taking on certain projects. It helps to reduce the uncertainty that always comes with decisions. It also helps to put everything into perspective. So you can make the right decision that can benefit your business.