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Category: Articles » Business » Management » Article » Article Code

How to Make A Business Decision: Cost & Benefits Analysis

Have you ever been at cross-roads in your business and not aware which step to take? If you have, you are not alone as many business owners have had to decide which road they would like to travel. The situation can be extremely confusing with its multiple variables and the potential to change the course of your business forever. Cost-benefit analysis (CBA) is a method that can be used to formulate your ideas and make that decision that is best for you and your business. CBA is a weighted scale approach to decision making. Like a scale if ... read more

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CBA is a weighted scale approach to decision making. Like a scale if the benefits outweigh the costs than the decision should be affirmative or visa verses if the scale is tipped on the cost side. The method is simple to use if you understand how it works and utilized anytime you have a business, personal, or professional decision to make.

Take a piece of paper and draw a line down the middle from top to bottom. On the left hand side write "benefits" and on the right hand side write "costs". On the "benefit" side list all the potential advantages to saying "yes" to the decision and on the "cost" side write all of the costs associated with implementing the decision. You are now able to see a list of all the benefits and costs.

To determine if such a decision is economically feasible for your business you simply place a monetary value to each of the items listed on your cost and benefit columns. It is vitally important that each of these monetary values reflect the actual cost or benefit of each item. To skew the price tag will skew the overall results and give you a false answer. On the bottom of the Cost and Benefits column add up all the values and then subtract the Costs from the Benefits. If the number is negative you will not want to implement the business program/strategy. However, depending on how much it is positive you have a green light to proceed with the decision.

The Cost Benefits Analysis has important uses in the world of business. The system can get more complex depending on the nature of the decision and the impact of that decision. This system allows the decision maker in the business to take a thorough look before giving that "green light" which may change the course of his/her company.

The following acts as an example:

The New Business World Blog desires to purchase rss feed submission software. In this simple same I will show how the process works.

Benefits:

Increase visitors by 25 a day. (1% sales per visitor X 7 days a week X 25 visitors X $ 50 advertisement = $87.00)

Reduce time involved in submissions by 10 hours a week. (10 X $10.00 per hour = $100.00)

Total benefits per week = $187.00

Costs:

Purchase Software $20

Two hours a week to run. ($10 per hour X 2 hours = $20)

Total costs for the week = $40.00

Total Benefit or Cost:

Benefit $187.00 – Cost $40.00 = $147.00 
 
Thus it would be wise for me to purchase this software.

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