Introduction to Cost benefit Analysis
While running a business one of the most important things is to know which decisions are right for your business and which are the ones you need to let go for the benefit of your business. Cost benefit analysis is a systemic process by which companies and businesses analyse which decisions they make are beneficial for their business and which are the ones to let go.
This is done by calculating all the project costs and subtracting them from the benefits gained from the project or decision. This is the job of the cost benefit analyst who sums up all the potential benefits and subtracts the costs that were used for the concerned project or decision. This value is sometimes represented as a ratio.
This value is used to decide if the decision is worth making or whether you need to discard it. This depends on the ratio of the potential benefits of the project or decision to the overall costs of the project or decision.
If the potential benefits are more than the costs then the decision is worth making but if it is the other way, that is if the costs outweigh the potential benefits then you may want to rethink the decision and decide to let go of the initial decision to prevent loss.
Advantages of Cost-benefit Analysis
Cost-benefit analysis is one of the important financial metrics in the business world as it helps you to decide which decisions will prove to be beneficial for your business and which are the ones you need to rethink. Cost-benefit analysis has a lot of advantages including the following:
- Cost-benefit analysis is data driven and gives you and your business organisation a clear idea for evaluating a decision keeping the personal opinions and biases aside.
- As it is clearly based on data, it helps you to make calculative decisions and make your business more logical.
- Usually business decisions are complex but by using cost-benefit analysis they can be made a bit simpler.
- It helps you uncover hidden costs like intangible or indirect costs and also some hidden benefits which may not be that obvious.
- Once you know the ratio of potential benefits to the overall costs, it will make it a lot easier for you to make decisions on that front. If a situation occurs where the costs outweigh the benefits, you can think about different strategies using which you can tackle the situation.
