Getting the most out of every idea and investment has become the necessity for businesses today. From large enterprises to startups, most companies rely on cost benefit analysis to support decision making and gain an evidence-based view of the issue being evaluated. By providing an unclouded view of the impact of a decision, cost benefit analysis enables businesses to develop a business strategy, evaluate a new hire, efficiently allocate resources, and improve purchasing decisions. Through this article, our experts highlight the key steps involved in performing the cost benefit analysis.
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Steps to Perform Cost Benefit Analysis
Cost Benefit Analysis Step #1: Establish a framework for analysis
Identify the state of affairs before and after the investment or policy change. Outline the proposed program or policy change in detail. Measure the profit of taking up any investment option as opposed to doing nothing. Sometimes the status quo is the most lucrative place for businesses to be in, but it requires identification of risks beforehand.
Cost Benefit Analysis Step #2: Analyze costs and benefits
Once the framework is established, sort costs and benefits into different categories. The primary categories associated with different categories are mentioned below.
- Direct costs are often associated with the production of products or services.
- Indirect costs are fixed in nature. They may either come from a cost center or department.
- Tangible costs are the costs related to an identifiable asset such as payroll, rent or purchasing tools.
- Intangible costs are costs pertaining to shifts in customer satisfaction, and productivity levels. Such costs and difficult to identify and measure.
- Real costs are expenses that contribute to the bottom line net-benefits.
Cost Benefit Analysis Step #3: Determine a deadline for expected cost benefits
Time is the most important element when it comes to decision making in businesses. Analyze when the costs and benefits will occur and how much. This will help you to align yourself to the expectations of all interested stakeholders. Also, the timeline will allow you to plan for the impact that the cost and revenue will have on the operations. This will empower you to manage contingencies in an effective manner.
Determining a deadline for expected cost benefits is crucial for companies to develop a contingency plan. Subscribe for a free demo to get unlimited access to SpendEdge’s insights and web-based procurement platform.
Cost Benefit Analysis Step #4: Calculate net present values
Compute return on investments by subtracting costs from benefits. Also, determine the time required for benefits to repay costs. While computing net present values or ROI, companies must estimate the situation with the project and without the project. To be specific, alternative options must be explicitly specified and considered in the evaluation of the project.
How SpendEdge Can Help You?
Performing cost benefit analysis is imperative for companies to make economically viable solutions. Costs and benefits should be precisely defined with minimal involvement of subjectivity to determine the feasibility of projects. With in-depth analysis of different procurement strategies, our experts execute a comprehensive cost-benefit analysis and provide a realistic assessment of risks and ensure that you receive the best value-for-money.