Finance

Posted 13 Aug 2019, Editor's Desk

How to Do Cost and Benefit Analysis in Business


Introduction

  • Are you facing difficulty in taking a decision?
  • Do you know the importance of Cost Benefit Analysis?


In any business or in your personal life, decision making plays a very important role. A decision can lead you to prosperity or failure.




Often, you would have come across questions like whether to change the house or not; whether to change the job or not; etc.


But the question is “How to take a decision”?


Herein comes the concept of Cost and Benefit Analysis, which is essentially a great decision-making tool. It includes the analysis of Cost (the amount of money, effort, and time spend to perform an activity) and Benefit (the Outcome associated with that activity).



Cost and Benefit Analysis Definition

Cost and benefit analysis is an economic evaluation in which the non-financial cost should be considered as a financial cost and non-financial benefits should be considered as financial benefits.


For Example:

Many BPO, IT and Non-IT companies give an increment of only 5% in salary but add other small benefits like- Pick & Drop facilities, Snacks during break time or in the evening, etc. 


Actually, many big companies try to touch their employees’ nerves or play with their mindset through cost and benefit analysis by giving a high level of comfort so that they cannot think about switching anywhere else.


In other words, the employees in these companies are not able to do the Cost and Benefit Analysis and hence, not able to take a decision to give a boost to their career growth.


“It is better to join a small startup, where you’ll get the high opportunity of Learning, Leadership, Salary, and Growth.”  

- Jack Ma (CEO, Alibaba)



Evaluate the Economic and Non-economic Cost

Brainstorm all the costs and all the benefits-


First, add cost and then measure benefits


COSTS -   Add value of (Direct Cost + Indirect Cost + Opportunity Cost + Tangible Cost + Intangible Cost) 

Vs.


BENEFITS - Add value either in monetary terms or in terms of increased or decreased efficiency (Production + Employee Safety + Team Unity + Sales + Customer Goodwill + Brand Equity + Environment Protection + Turn over + Efficiency + Errors + Client Satisfaction + Enthusiasm + Global Expansion + New Markets + New Partners + Enjoyment)

  • Now check which one is more
  • If Cost is more than Benefits- Don’t take the decision.
  • If Benefits are more than Cost- Take the decision.


Example

Suppose you need to purchase machinery- 

Add the following costs-


Costs - (Price of Equipment + Transportation Cost + Manpower Training Cost + Electricity Cost)


Vs.


Benefits - (Efficiency of Manpower+ Utilization of Time + Increase in Production + Morale of Employees)


If Cost is more than Benefits- Don’t Purchase that Machine.

If Benefits are more than Cost- Purchase that Machine.

Do you have a query..?