Small-business owners often act as chief executives that choose the projects companies pursue. Deciding which projects to pursue and which to avoid is one of the most important aspects of business management. If a project doesn't create enough revenue to cover its costs, it may reduce profitability. A cost-benefit analysis is a common business planning tool that involves comparing the likely costs and benefits of potential projects to choose those that offer the greatest net benefit.


Cost-benefit analyses are advantageous because they simplify complex business decisions. Different business projects might entail vastly different types of expenses and details at a low level, but a cost-benefit analysis frames all projects in the same simple terms: total benefits, minus total costs, equals net benefit. The simplicity of the cost-benefit analysis lets businesses compare projects of all types no matter how dissimilar they are.


Another benefit of a cost-benefit analysis is that it provides an objective way to compare projects. Business owners who are emotionally attached to or have time invested in certain projects may be predisposed to pursue those projects, even if there are better options available. Comparing projects based on the actual financial costs and benefits eliminates the emotional element and may help business managers overcome biases for the good of the business.

Goal Setting

While a cost-benefit analysis can help a company estimate the net benefit of a project, benefits are typically more difficult to predict than costs. For example, a company might know the exact cost of the materials needed to produce a new product, but it is impossible to know exactly how many units a new product will sell when it goes on the market. Estimating costs and benefits can, however, give a business an idea of the lowest amount of revenue a new project needs to produce to break even and help set revenue goals to make projects profitable.


A cost-benefit analysis can be a useful tool for decision-making, but the accuracy of a cost-benefit analysis is limited by the thoroughness of recognizing likely costs and benefits. If a business fails to recognize potential costs and benefits, it can cause poor results that lead to sub-optimal decisions. For example, if a factory fails to account for the environmental impact of its operations as a cost, it could lead it toward projects that create more pollution, which might be bad for society and hurt the company's reputation.