The Simple (And Free) Business Tool You're Probably Not Using Enough

If you’ve ever taken any kind of business studies course, you’ll probably be quite familiar with the cost-benefit analysis already. But how often do you really use it? It’s easy to assume that our decision-making is infallible, but in reality we can sometimes miss crucial elements and fail to consider the full implications of a decision. That’s where the cost-benefit analysis comes in handy. In today’s post, we’ll explain how to use it best.

The building blocks of a CBA

The cost-benefit analysis, or CBA as we’ll call it from here, isn’t a real-world tool like a computer. Rather, it’s a methodology for making better decisions. How does it work? We’re glad you asked. If you’ve ever found yourself wrestling with a business dilemma like any of the following, a CBA could be just what you need:

• Judging whether to install a new computer system or not.
• Deciding whether or not to hire new staff.
• Weighing up the pros and cons of a new direction for the business.

For problems like these, a cost-benefit analysis can be a very powerful tool. The reason is that a CBA allows you to list out the exact cost of a decision, then compare that information directly against the predicted benefits of that decision.

How to carry out a cost-benefit analysis

To perform a standard CBA, your aim should be to assign a monetary value to both the costs and the benefits, then use the differential to aid in your decision-making. Let’s take a look at a very simple example:

• The cost of a new truck for the business is £20,000
• The benefits of buying a new truck may include: increased service radius and more potential customers. Using historical data, you can make an educated guess that this will total approximately £25,000 gross profit increase over 18 months.
• You then look at the difference, factor in the timescale, and you’ll be well prepared to make an informed decision.

In our example above, it seems that buying the truck would be a smart idea, as within 18 months it will have essentially paid for itself. This is the essence of the cost-benefit analysis.

Things to remember

Before you go and CBA every area of your business, there are a couple of things to keep in mind. First of all, remember to factor in assumptions. What this means is, when you make your decision (particularly if it involves longer timescales), ensure that your assumptions about finances will be accurate. On top of this, remember that not all costs are tangible. For example, it’s hard to put a price on something like the benefits of air conditioning – so be sure that all relevant parties agree to the pricing used in the CBA.

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