There is a common saying that you have to spend money wisely to earn more money. A cost-benefit analysis will help to determine the best potential returns while spending. It was a French economist Jules Dupuit who first introduced this term in 1848. According to this term, you have to add up the benefits of a business decision. Besides that, you have to compare the benefits with the associated cost. Sometimes, this value is presented as a ratio. If the benefits exceed the costs, then you can say that it is good to make a decision. If the cost exceeds the benefits, then it is not wise to make a decision. It is the form of data-driven decision-making that most companies use. Most companies and organizations use it through business analytics to determine possible benefits. This article by experts of PhD dissertation writing services will provide a complete guideline for a cost-benefit analysis.
How to Do a Cost-Benefit Analysis?
There is another name for this term, and that is a cost-saving analysis. It helps you to determine either you should make a move for your new project or not. There are six different steps to conduct a cost-benefit analysis. Let’s discuss those:
- Understand the Cost for Maintaining Status:
It is the very first step that helps you understand the cost of doing nothing. Apart from this, it enables you to make a decision for a new project or proposal. Sometimes, it is wise not to start a new project. But a business is all about taking risks. If you are not making bold moves in your business, you might end up in a disastrous situation. You should make a bold decision to stay in business. Otherwise, your competitors will leave you behind. Then, it will be a real challenge for you to compete with them. Sometimes, if you don’t make new investments, then it will even cost you more. You need to establish a framework for your business analysis. It will help you to identify the goals and objectives depending upon the business.
- Identify Cost:
In this step, you have to brainstorm. It will help you to analyze the costs that are associated with the new project. You can make a complete list of any cost that might impact your business. In your list, you can add:
- Upfront costs
- Unexpected costs
- Tangible costs
- Ongoing costs
- Future costs
- Any potential risk that may have a cost
You can brainstorm about all these potential costs. And later on, you can link them with the possible benefits. There are several methods that you can use to identify the cost of a new business. Those are:
- Expert Judgement Method
- Analogous Estimating Method
- Parametric Estimating Method
- Bottom-up Estimating Method
- Three-Point Estimating Method
- Data Analysis Method
- Project Management Information System Method
- Decision-Making Method
All these methods will help you to identify all the possible costs in your new business.
- Identify Benefits:
It is the third step that will help you to identify the possible benefits of the new project. In this regard, there are several important questions that you need to ask:
- What amount of additional revenues will you get after making a new investment?
- What is the return on this investment?
- What is the role of investment (ROI) for your company or business?
- Do you want to measure ROI with revenue or market share?
- What are the possible benefits associated with ROI?
- How far into the future should you look to identify long-term benefits?
So, it is important for you to define the ROI for your business. It will enable you to link the possible benefits. If you look too far, the less confident, you can be about potential benefits.
- Assign the Monetary Value to the Costs and Benefits:
It is the fourth step for conducting the cost-benefit analysis. It is important for you to assign a monetary value to the costs and benefits. They should be measure in the same monetary unit. You need to remember one thing if you are conducting this analysis. That is, you should not separate costs and benefits into different denominations. They are often divided into different denominations based on country or region. If you do not separate them, then it is easy to track actual cost and return in the same currency.
- Create a Timeline
Recommended by a dissertation help firm, you need to plan when you can expect the costs and benefits to occur. Apart from this, you can decide their amount. For this purpose, you can create a timeline. It will help you align, define, and track the expectations of your business. It will also help you to plan the future costs and their impacts on the revenue. This way, you will be able to manage and adjust as necessary as things change in the business.
- Compare Costs and Benefits:
It is the final step in conducting the cost-benefit analysis. In this step, you need to calculate total costs and total benefits based on your previous steps. It is important for you to use the same currency for all your business calculations. If you compare the two same values, then you will know that either it will be beneficial or not. Apart from value comparison, you need to compare few more things. For example, you need to compare inflation, discount rate, and payback period. When you compare all these things, only then you can decide about future investment. If cost is less than benefits, then you should make a move; otherwise, not.
The cost-benefit analysis plays an important role if you are making new investments. If you invest without thinking, then you can end up in a complete loss situation. O avoid any inconvenience, you need to start your paperwork. In this regard, the cost-benefit analysis will help you. You need to compare the costs of future investments and the benefits you can reap. If your benefits are greater than the costs, then you should invest in the new business. Otherwise, it won’t be a wise decision to invest in a business that has fewer benefits.