Cost benefit analysis is a powerful but simple tool that allows a business to determine whether or not to make a change. It takes into account both the assumed risks and costs associated with a project, as well as the immediate and future benefits. The changes the analysis deals with are often projects, such as constructing a new office, buying more space, deciding to downsize, hiring more employees or changing production methods. It gets more complicated when trying to assign numerical values to intangibles or future projects. However, calculating the benefit in a cost benefit analysis is a fairly straightforward process.

Step 1.

Calculate the concrete benefits, such as the amount of additional money generated, the amount saved, the increased number of units you are able to produce, the decrease in expenses, etc. Anything that will change and can be easily quantified is in this category. Look both at long-term and short-term benefits.

Step 2.

Assign dollar amounts to those aspects that are not already monetary figures. For example, an increased number of units will generate X amount more money for your company. This is the number that matters.

Step 3.

List the intangible benefits. In a simple cost benefit analysis, it is not necessary to do this, but it makes the process more accurate. Intangibles may be things such as the amount of land saved from pollution, improved quality of life in the workplace or an increase in employee benefits.

Step 4.

Assign dollar amounts to the intangibles. It is not easy to assign a monetary benefit to saving a piece of the environment, but it is possible. Employee benefits will make employees happier, which will make them more loyal and productive, and also increase the retention rate, meaning your business will be more consistently productive. It is often a complicated process to assign numbers to this particular component, especially when they must be specific.

Step 5.

Add together all the monetary values you have gathered. This is the benefit figure you need for your cost benefit analysis.