Best Practices for Cost Benefit Analysis
Cost benefit analysis is basically a technique that is used to analyze business decisions. More precisely, it is used to compare the total costs of a project or a program and the benefits derived out of it. Cost benefit analysis helps choose the best approach and evaluate the quantitative and monetary impact. As a result, it can […]
Cost benefit analysis is basically a technique that is used to analyze business decisions. More precisely, it is used to compare the total costs of a project or a program and the benefits derived out of it. Cost benefit analysis helps choose the best approach and evaluate the quantitative and monetary impact. As a result, it can be said that cost benefit analysis helps in deriving the factors, which influence the business in the short and long-term.
According to the experts at SpendEdge, “cost benefit analysis helps the management to gain knowledge about pricing strategies and its effect on the supply chain; thus, helping build strong supplier relationships and driving profitability.”
#1 Cost benefit analysis framework setup
The program or the project and its current scenario need to be specified before implementing the analysis technique.
#2 Target groups need to be recognized
It is very important to decide the target group that should be recognized for the benefit of costs. So, the analysis should be determined based on the geography to get more precise results by the technique.
#3 Costs and benefits need to be categorized
Categorization of costs and benefits is very important. It should be categorized as direct or intended benefits and indirect or unintended benefits. Also, the labeling needs to be done as tangible and intangible, real and transfer benefits. This division will further help in ensuring that the effect of analysis is best understood.
#4 Long-term analysis of costs and benefits
Impact of change needs to be analyzed even before beginning with the actual process of cost benefit analysis. It is very important for the result accuracy in the longer-term.
#5 Monetize costs and benefits
#6 Convert future costs and benefits into the present value
Converting future costs and benefits into present value is one of the key steps for cost benefit analysis. The social discount rate is the rate at which tradeoffs are made over a period of time. This discount rate varies from agency to agency and it lies somewhere between 2 to 7%.
#7 Calculate the net present value
When costs are subtracted from benefits, it gives the net present value.
#8 Analyze sensitivity
The accuracy of estimates and assumptions are checked at this step. It is done by increasing or decreasing the social discount rate as per the requirement. If the final outcome is positive, then the decided number should be accepted. But in case the result is negative, then the recalculation is advisable. This is one of the crucial steps for cost benefit analysis.
#9 Recommendation to be made
This is the final step in cost benefit analysis. All the derived results need to be assessed and make any qualitative changes if required and then recommend.
Thus, the analysis should be kept as comprehensive as possible as it reflects the interests of all the stakeholders who will face the impact of the program.