What Is a Cost Benefit Analysis?
Cost-benefit analysis is a process used to weigh up decisions as objectively as possible and measure benefits in business. Commonly conducted when a company wishes to evaluate potential costs and revenues generated from a project. The outcome of this analysis will determine the project is financially feasible or not.
How to Make a Cost-Benefit Analysis?
Study shows that many businesses suffered financial failure because they invested in a project that sounded good but can't generate any returns. The main reason for creating cost-benefit analysis is to provide safety measures to help the company develop policies that make the most efficient use of resources.
1. Define Your Goals and Objectives
The first step is to define your goals and objectives in making a cost and benefit analysis. What project is your company trying to develop? What outcomes do you plan to achieve in making a cost-benefit analysis report? Ask yourself these questions and create a clear and definite idea of your goals and objectives. Check the scope and limitations of your project and its finances and decide whether the project is worth the effort or not.
2. Review Your Previous Cost-Benefit Analysis
Before you begin your analysis, review your previous cost-benefit analysis reports and use the same methods to maintain continuity in its format. Check your previous problem analyzed as well as your previous cost and benefits. Then, list down all the information gathered in your previous analysis. Doing this makes comparison easier and more useful over time.
3. Gather Your Data
The next thing to do is to gather data for your analysis. Ask yourself, what is my current problem? What are my current costs and benefits? List all your stakeholders, the measurements you are using, your common currency, the discount rate, and the net present value of your project options. Compare your gathered data from the data you have previously and make an informed decision on your cost analysis and benefits.
4. Identify Your Outcome Costs and Benefits
After conducting your data analysis and calculate your cost and benefits then identify your outcomes. Evaluate for any positive and negative consequences, then apply for all relevant costs and benefits. Never forget to factor out your intangible costs and benefits in your business, such as your customer and employee impact in pursuing a new business strategy, construction of manufacturing plants as well as delivery impact.
5. Conclude Your Findings
Conclude your findings and make choices that you may recommend to your company's project. Consider your opportunity cost and potential risk in your conclusion as well as your revenue and sales increase, and competitive advantages before recommending action to your business.
6. Review Analysis
Finally, review and proofread your cost-benefit analysis report for any errors. Make sure everything is well-organized, comprehensive, and direct to the point. Always apply monetary measurement to all items in the cost-benefit list, and never underestimate cost nor overestimate benefits.