Businesses use cost-benefit analysis to determine the intangible and tangible costs, and benefits to their business models when they undertake certain actions or choose not to do so. Government and nonprofit institutions also focus on benefits and costs when trying to spend the least money to make the most improvement in societal problems. Tangible cost benefits refer to costs and benefits that these organizations can easily measure in dollar terms.
Businesses predominately consider tangible costs and benefits when conducting an analysis of whether they should complete projects. These differ from intangible costs and benefits due to the fact that businesses can determine tangible consequences of products using their own market data or that of the competition. Tangible costs include expenses for hardware and software, new personnel, personnel training, new facilities, or upgraded facilities and machinery. Tangible benefits include lower costs to produce product, increased efficiency and higher volume of sales.
Businesses cannot usually measure intangible costs and benefits, because the side effects of these projects rarely have a track record in the real word. For example, a business that releases a new product can run market surveys but cannot realistically know what the general public’s opinions of the product will be until it goes to market. Intangible costs can include low-probability events, such as lost opportunities and customer dissatisfaction. Intangible benefits can include increased customer satisfaction and improved employee morale.
Businesses use ratios to determine whether they will profit from tangible investments. They desire a single input of tangible cost to receive more than one output of tangible benefit, or else they will lose money on their capital investments. They will usually have their management team put together multiple proposals for projects and will then use cost-benefit ratios to compare different projects and determine which of them will yield the highest return. These calculations also allow them to obtain loans from financial institutions or to sell their shareholders on the merits of a project.
Businesses should never solely use tangible cost-benefit analysis to determine the profitability of a product. If a product or new factory causes environmental damage, the government may fine the business or shut it down, causing the project to turn a loss. They should never ignore projects that have few tangible benefits but many intangible benefits. A business that doesn’t undertake a project that improves customer loyalty may go out of business if his customers switch to the competition.
Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.