This is an important topic the more your business grows. You will have decisions to make, and you may not always be sure if it’s the right decision or not. This article will talk about how you can help yourself reach the answer.
Cost benefit analysis and decision making can touch all areas of business; systems, infrastructure, outsourcing, employees, your processes – everything.
So, firstly – what is Cost Benefit Analysis?
Cost Benefit Analysis is the process by which something is evaluated. This ‘something’ may be an action, an investment, a project etc.
There are two main applications of Cost Benefit Analysis:
- To determine if a project, investment, item is a good one – do the benefits outweigh the costs
- To provide a basis of comparing projects, investments, etc, to each other by determining where the greater benefits lie
Projects and investments could be seen on a larger scale, e.g. buying a business – weighing up potential businesses that could be bought to ensure the most favourable one is purchased.
Or, it could be on a much smaller scale, e.g. investing in a marketing company to undertaking your social media marketing.
The evaluation process is the same:
- Evaluate the cost of doing nothing; this might be monetary, or it could be a consequence, e.g. if you’re flat out in your business and you don’t implement a change of some sort it could mean you have to work evenings or weekend
- Identify the cost of the project or investment
- Identify the benefits
- If the cost or benefit isn’t monetary, assign a monetary value to it – in the example above, create an out of hours fee for yourself
- Compare the costs and the benefit – which one wins?
This leads us to the Decision Making
Once you’ve determined if the cost outweighs the benefit you can make a decision – whether that’s a positive or negative one. You have a lot of information to make an intelligent and informed decision.
If you’ve never thought about cost benefit analysis and how it can help in decision making, here are some benefits for you:
- It’s a sensible way of comparison
- It helps to simplify complicated and/or difficult business decisions
- Forces you to look at all of the elements of a project/invest to determine the net cost or benefit
- It removes gut instinct and provides a basis of logic