Performing a Cost Benefit Analysis

When it comes to important life changing decisions, many of us have no doubt been encouraged to make a list of ‘pros’ and ‘cons’ to ascertain which direction to take. Businesses too face similar situations when they are confronted with a potentially profitable, but risky, new venture. At times like this companies choose to undertake a business risk analysis (also known as a ‘costs-benefits analysis.’) This is a process that enables business owners to weigh the pros or benefits of a particular undertaking against the cons or costs that might accrue to it.

What it involves

A cost-benefit analysis aims to identify and quantify the costs and allied benefits of any significant business decision, in monetary terms. If the financial benefits were to outweigh the input or incidental costs, the deal or project in question would qualify as measurably and demonstrably beneficial to the company. If the costs outweigh any future benefits, however, the owner might decide to abandon that particular course of action. Calculating the cost-benefit quotient of an activity is an attempt to gauge its profitability over time.

The cost analysis template

As mentioned earlier, a cost analysis template basically consists of a ‘costs’ column and a ‘benefits’ column. Let’s set the scene. Say you’re planning to rationalise segment-specific workflow at your company. As of now, key components of the project management cycle have yet to be computerised: project managers still submit receipts from field trips, accompanied by vouchers, to the accounts department and accountants continue to manually enter expense data into Excel. Not only does this approach generate a lot of unnecessary paperwork, it is also slow-paced and unwieldy.

As company head, you have to determine whether to overhaul the current setup and computerise the entire documentation process. If you do decide to do this, there are a number of things you need to keep in mind such as the cost of buying and installing the software; and time spent training project managers, their teams, and the accounts department in how to use it. The training will cut into employee’s schedules and reduce their work output for a limited period of time.

On a more positive note, you could well be setting up a system that will pay for itself by improving productivity, ramping up quantity and quality of output, and generating profits.

Now you see why you might want to do a cost-benefit analysis! While studies show that computerising workflow has long-term benefits, you will eventually have to justify the costs to your associates. This is where the cost-analysis comes into play. To conduct this exercise you will need to determine which template best suits your needs. To do it justice, you can begin by itemising and categorising the expenses that you will incur during the overhaul. Do some research as well as some comparison-shopping and calculate the cost of each of the items involved. Add them all up and make a note of the sum total. Once this is done, create a list of the short/mid/ long-term benefits of each of these purchases and how you expect them to eventually serve the company well in future.