What is Cost Benefit Analysis?

Not Sure What Cost Benefit Analysis is? Get to Know About it Now

Cost benefit analysis helps us to make business decisions regarding different projects. As the name suggests, it also helps us to identify the amount of capital to be spent and the benefits to be made from a particular project.
BusinessZeal Staff
Last Updated: Jun 3, 2018
Cost benefit analysis is important because, it can help us decide what would be the total expenditure on a particular project along with the expected returns from it. Using this concept, it becomes easy to decide whether implementing the project will be a profitable deal for the organization or not. Let us understand this concept in detail.

What is it?

As mentioned above, it involves identifying all the costs and benefits, which you would make from a project. Then, once this is done, you get to know what your profit would be by subtracting the total cost from the total benefit. If this number is positive, then it can be said that, your business strategy could be successful. In case the costs are more than the benefits, you need to change your strategies to make your venture profit making. However, the main question is how to calculate the grand total of the costs and the benefits?

How to Calculate it?

In order to count the total costs, you can prepare a list of all your monetary expenses one after the other. Make two columns ― particulars and cost. In the particulars column, write the description of the material you are buying and mention its cost in the cost column. Ideally, your particulars can include raw materials, licenses, employees, transportation, training, etc. You should also include non-monetary costs such as production losses and assign them values. Now, add all the costs to get the total cost. After calculating the costs, it is time to calculate the grand total of benefits. Again, make two columns namely particulars and benefits. The benefits from your business can be in the form of direct profit from selling your goods and services, or increased investments from your investors or shareholders. Benefits from the sale of assets should also be added. Now, add up all the individual benefits which will give the total benefit.

After your analysis is over, you will have to discuss several aspects of the business with your partners. If you find that costs are more than benefits, think of some ways to reduce the production costs to save money. Reduction in the employee cost can always increase your profitability. Decision-making abilities are a must for effective cost benefit analysis.

Example

Suppose you're planning to start a software programming training institute. So, in this case, you will need space on rent, several computers, faculty members, electricity, and members to entertain inquiries at the reception. You need to assign monetary values to each of these needs and add them up to get the total cost. The total benefit for your institute can be calculated by multiplying the fees you will be charging by the number of students studying the courses. At the end, subtract the costs from the benefits to get the profits. You can also determine the break even point, which is the period that you take to recover all your costs.