Cost Benefit Analysis is a process by which businesses and individuals determine if the benefits of a project or investment are worth the costs. Every project or investment carries with it both benefits and risks. Therefore it is best to determine ahead of time if the benefits are worth the risks.
Say a person wants to set up a small business. When first embarking on this project, the person will need to sit down and outline the costs involved with setting up a small business such as inventory, payroll, rental of the space, travel costs, and also allowing for unexpected costs such as repairs to the space. Then the individual will need to list the benefits of starting this small business: revenue and providing a product or service to the community. In a small business, if the revenue will make up for the costs involved, then the business is a success. If, however, the costs exceed the benefits, it may be best to rethink one’s plan. Perhaps the scope of the business could be focused on one service or product instead of several in order to bring down costs.
Another example would be if an individual wishes to purchase a car. Obviously, there are costs that come along with purchasing a car: the price of the car itself, gas, maintenance, insurance, tag, and title taxes. However, if an individual needs a car in order to travel to a new and better paying job, then the costs of the car are covered by the job. And thus the purchase of a new car is a sound investment. If, however, the costs of the car are not covered by the job, one should seek alternate transportation options or opt for a cheaper/used vehicle.
When embarking on a large project, such as opening a new business, or making an investment, such as purchasing a car, it is best to remember these guidelines to help you determine if the costs and risks involved are worth the investment.
Determine the costs involved in the project or investment you are looking into. Assign real monetary values to these costs so you can see how much this will cost you. Try to allow for costs that may be hard to anticipate, such as repairs or unforeseen difficulties in starting your project. While not always easy to predict, assign monetary values to these as well. Determine the benefits of the project such as revenue or the opportunities that the investment will give to you. Assign monetary values to the benefits. If the benefits of the project or investment outweigh the costs and risks, then the project should be pursued. If the benefits of the project or investment DO NOT outweigh the costs and risks, then it is advisable to rethink project and find ways to cut costs without diminishing the outcome.
Cost Benefit Analysis is a useful tool for determining if a project or investment is a wise decision before it is pursued and can save one precious time and money. There will always be risks involved in any major project or investment. Going through these steps will determine if the benefits outweigh the risks involved.
Here is our collection of 41 Free Cost Benefit Analysis Templates & Examples!,