Cost-Benefit Analysis: Everything You Need to Know

When it comes to making decisions or running a business you want to make sure you’re doing it the right way. But how do you make sure that you’re doing everything properly? Well, you’re going to need to go through a few different processes, and one of those is a cost-benefit analysis. Or course, if you’re new to running a business or new to being a project manager you may not quite understand what that even means. After all, you’ve never had to do it before. So, let’s take a closer look.

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What is a Cost Benefit Analysis?

In short, a cost-benefit analysis is a way to determine what the costs are for the project proposal that you’re looking at compared to the benefits. This sounds simple, but it can actually be quite time-consuming. You just need to make sure you know what you’re getting into and just how it’s all going to work out in the long run. That way, you can make sure you’re making a wise decision for the present as well as the future of your business.

You’ll need to create a list of all of the different expenses that are associated with the project and then all of the different benefits that would come about if you did it (getting paid is a benefit). Then you can determine four things:
-       Return on investment
-       Internal rate of return
-       Net present value
-       Payback period

When you’ve gone through all of the steps and done all of the math you’re going to have a good idea of just what you should do and whether you should take on the project or whether you should pass.

Why Do a Cost Benefit Analysis?

You may want to do a cost-benefit analysis if you’re a project manager who is getting ready to take on any kind of project. After all, you want to know what you’re getting into and whether or not you’re making a sound business decision. You need to check out all of the information and data to make sure that’s exactly what you’re going to have and that you don’t have to worry about the potential risks. At least, you won’t have to worry about them as much.

With a cost-benefit analysis, you’re going to evaluate all of the data that you can possibly get about a specific project or task or responsibility. From there, you can see if the task is actually going to be worth the amount of time and money that it takes to complete it. Compare how much it will cost you in time, effort, labor, and so on to execute that task. Then, calculate just how much money you will earn or that you will save after you’ve put it in place. Will that cost balance out or give you a bonus of some type if you do it?

If it will then chances are you’re doing good and you will benefit from the task or project. Your business will come out at least as well as they were before and potentially even ahead by a small (or large) amount. But you wouldn’t have known that if you didn’t do the cost-benefit analysis first. You need to know what the potential good is that comes from this type of work. But how are you actually going to perform this type of analysis? And how can you make sure you actually have all of the information that you’re going to need to do it properly?

The Steps to a Cost-Benefit Analysis

Are you ready to perform a cost-benefit analysis on a project that needs to be done with your company? Are you considering taking on a project but aren’t sure if it’s actually going to be a good idea? Well then, it’s a perfect time to go through each of these 10 steps to find out what you need to know and make sure that whatever decision you make is going to set you and your business up in the right direction, toward making money rather than missing out.

1. Know the goals and objectives.

The first step is to make sure that you know exactly what you’re trying to accomplish with the project. Are you fully informed as to exactly what this project will entail? That means you need to know all of the specifics of what your boss, your client, or anyone else is expecting you to do so you can accurately budget out the project and determine if it’s actually going to be worth the investment that you’re going to make. If you don’t know everything you could miscalculate your analysis and that could lead to making the wrong decision on a project.

2. Know the alternatives.

What could you do if you didn’t do this project? Is there a different way you could perform the same process or get the same outcome? What does that look like? If you didn’t take this project from this client would you be able to take on a different project from a different client? What would that look like? Make sure you fully understand what you’re giving up or what you’re deciding against by choosing this project instead of something different or a different method.

3. Know the stakeholders.

You need to know who actually has a stake or a role in this project. You don’t want to make a decision based on the wrong information. Who are you doing this project for? Who needs it done? Why is it important to them? Make sure you know everyone who is going to be involved in the outcome or who will potentially be affected by the outcome. That’s going to make you feel a whole lot better and it’s definitely going to improve your understanding of the project in general. Make sure you create a list of all of these people and check with everyone to make sure it’s complete.

4. Know how you’re measuring.

How are you going to measure out each of the different parts of the process? How are you going to monitor things like the cost of materials or labor? You need to know exactly how to monitor and maintain your project reports and you absolutely need to make sure that you are going to report them properly. If you set things up in the beginning you can measure everything however you like, but it needs to be well laid out and understood right from the start, so there’s no misunderstanding about the results.

5. Know the outcome.

Take a look at the costs that are going to be associated with the project and make sure you have everything accounted for. You need to make sure that even the smallest of things are added to the total costs. Then, you want to take a look at all of the benefits that are associated with the project. Once again, it doesn’t matter how small those benefits are. You want to account for each of them so you can get a more accurate understanding of just what you’re getting yourself into.

6. Know the common currency.

Next, you have to layout the costs and the benefits in a way that’s going to make sense when you compare them to each other. That means you need to put them into a format that makes it easy to show similarities. Is the cost going to be 10 hours of your time? You will likely need to convert that into monetary value so you can see how it stacks up against the monetary value that you’re going to get in return. If you are comparing 10 hours of time to $10,000 it’s hard to see an accurate representation.

7. Know your discount rate.

You need to take a look at the discount rate for the project, which is going to be a percentage of the balance that you have while you’re doing your calculations. If you don’t know the discount rate you could inaccurately represent some of your numbers and that could affect the outcome that you find with your cost-benefit analysis. This is going to be your interest, so you want to know just what it comes out to when you’re balancing out everything else you need.

8. Know your net present value of project options.

When you calculate this number you’re going to subtract your present cash outflows from present cash inflows over a set period of time. Your net present value is going to be the number that’s leftover. This will help you determine whether or not you’re making a sound decision in terms of finances specifically. You can see what’s coming in and what’s going out and then figure out what you generally have leftover, and you compare it over a set period of time. This will help you create a foundation.

9. Know your sensitivity analysis.

Just how certain or uncertain is the output that you’re going to get from this project or this process? You’re going to look at the uncertainty of the output based on uncertainty in the input with this figure. It’s going to help you understand better whether you’re guaranteed a certain outcome or benefit if you perform the project or task or if there’s still a level of uncertainty to the results that you’re going to end up with. This can affect whether something is worth the risk or whether you want to pass on it in the end.

10. Know your decision.

Once you’ve taken a look at all of these things you’ll need to make a decision about just what you want to do. After all, you want to make sure that you are making the right decision and that’s going to take a bit of research and time. Look at everything. Do all of your calculations. Then make the decision that seems right for you and your company. It may not make sense to others. But if it makes sense to you then it’s going to be the right option. No matter what you decide.

Evaluating Even Further

When you evaluate further you may also want to look at facts like what the effects are going to be on users, nonusers, those who are involved in the project, and so on. Look at potential social, emotional, monetary, and other benefits. Look at the time that is being spent and look at how you’re going to recover in the future. If the project isn’t going to have an immediate benefit you’ll also need to think about how long it’s going to take in order to reap the benefits that are associated with the project.

Does it Work?

Overall, there are plenty of benefits to the cost-benefit analysis process. And if you’re doing it properly you can get a very accurate representation of everything about your project. Just make sure that you’re following along with the process and that you’re actually putting in all of the information that you need. If you don’t put inaccurate numbers or you don’t add in all of the numbers you could find yourself struggling to make the right decision and further struggling to get an accurate understanding. That could lead to bad decisions.
If you’re thinking about using cost-benefit analysis make sure you’re doing it right. And make sure you’re using Gantt charts, like those available through Instagantt, to help you do so. You’ll be able to record all of the different parts of your projects in a way that’s much easier to understand and that helps you, and your entire team, stay on top of the details.

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