Cost-Benefit Analysis: Who Needs It?

Cost-Benefit Analysis: Who Needs It?

It is natural to analyze the cost and benefits of most decisions in a day, at least mentally.  When we decide what to have for lunch, at some level of our consciousness, we consider the cost of the meal, prep time, location, and who to have lunch with. We compare that against the benefits of our personal health, business health, and any number of other benefits.

But there are times when a more thorough job of research and comparative analysis is required because of the current and future consequences of your business decisions.

Once you have identified a problem to solve or an opportunity to consider, whether you are looking at only one solution or a list of alternatives, try working through these four steps of a cost-benefit analysis:

1.       Determine the costs.  Some common costs are labour/time costs, marketing costs, capital costs, the cost of maintaining the course of action (on-going costs) over time, and supply costs.  When calculating your labour costs, don’t forget to include the portion of your own salary that will be attached to the final course of action.  You may also need to consider non-monetary costs, such as the effect on employee morale or your company’s image, your passion for the solution, and other less tangible considerations.

2.       Calculate the benefits.  Some benefits, such as a savings in supply costs (inputs) can be fairly easy to calculate.  But it can be a challenge figuring out the true cost of a lower priced alternative compared to its durability, cost of replacement, maintenance and/or time lost in the event of an equipment or product failure.  All the more reason to think it through.  Of course, quality and safety are of prime concern.

3.       Compare the alternatives.  Compare the various alternative solutions against one another and against the current situation.  Even if you are trying to determine the validity of a single option, you will still be comparing it to the status quo.  Create a chart with a list of costs and benefits to help you compare alternatives side by side.  For those items that are non-monetary or are difficult to quantify, add notes rather than hard data so you don’t miss them when making a final decision.

4.       Make an action plan.  Once you’ve chosen the preferred solution, possibly even a test phase for now, it’s time to create your plan.  In doing so, consider accessibility of the required resources, cash flow, competing priorities, and available labour.  If this is a solo project, you will need to determine how you will fit it into your current schedule.

You may want to do each analysis on a spreadsheet for communication purposes, but even jotting down your notes on a scrap piece of paper can help provide clarity. And clear thinking is always better than playing a guessing game when it comes to your business.

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