A cost-benefits analysis looks at the pluses and minuses of taking a course of action. Different versions of the analysis can make decisions easier no matter the size or context. Measuring costs against benefits serves well when introducing a new product line, deciding whether to hire additional help or even choosing a place to eat. The cost-benefit analysis is a relatively old concept, first described by French engineer Jules Dupuit in 1848.
A cost-benefits analysis is a relatively simple process, and you don't have to be an economist to perform one. In its simplest form, it looks at whether the costs of a project or decision outweigh the benefits. It is recommended you decide on a unit of measurement for the pluses and minuses, such as a dollar value.
Deciding To Start a Project
A good cost-benefits analysis looks at whether a project can be done and if it is worth doing. Both of these are useful factors when deciding to go ahead with a course of action. An analysis takes a look at all resources required for a project, whether they be money, materials or manpower. If an analysis indicates the project will be a money pit with little to show for it, it probably won’t be worth the time or effort to continue.
Large and Small Decisions
While businesses often apply a cost-benefits analysis to determine whether to introduce a new product line or add new employees, the analysis is useful for much smaller decisions. Even a decision such as whether to drive across town for cheaper gasoline takes a different look when time and effort factors enter a cost-benefit analysis. For major decisions such as whether to buy a business, more-involved variations of the cost-benefit analysis, such as a net present value analysis or internal rate of return study, will be more appropriate.
Options and Adjustments
Perform a cost-benefit analysis when you have several potential courses of action in front of you. It might show you if one option stands out or one needs to be eliminated from consideration. With a cost-benefit analysis, you can look at several scenarios at the same time. A poor cost-benefit ratio won’t necessarily kill a project, but it may uncover deficiencies that need to be corrected before continuing. These corrections can be as small as a few tweaks in the plan or as large as redoing it from scratch.