What Is Cost-Benefit Analysis? Definition and Guide

What is cost-benefit analysis

Cost-Benefit analysis is the process of analysing business decisions.  When a decision is under consideration, the cost of an option is subtracted from the benefit of it. By performing a cost-benefit analysis the management can tell if an investment is worthwhile or not for the business.

How to calculate a cost-benefit analysis

The consideration takes in all the benefits and all the costs involved. An accountant will try to put a dollar figure on all the elements of the cost-benefit analysis. For example a retailer may consider moving the store to a vacant building on another street.

The obvious benefit may be that sales will be higher when in the new premises going on figures from other stores. Costs involved may show a different story. Rent may be higher in the new building, taxes may be too and if the building is bigger, then operating expenses may rise above that of the existing premises.

With a larger customer base there may be a need to hire more staff; existing staff may look for salary increases as travel time rises or parking costs are higher on the new block.

By weighing up the return of the increase of sales with the overhead costs from the new premises the storeowner is doing a cost-benefit analysis. The result will be a major influence in the final decision.

The outcome of any cost-benefit analysis should tell the storeowner if a project is worth pursuing or rejecting. It should also tell the owner the costs to the existing store of not pursuing the proposed changes.

Risks involved

Any cost benefit-analysis comes from many calculations. The storeowner should get all costs and benefits into their analysis to avoid risk. If in doing the cost-benefit analysis the storeowner makes omissions the implications may be huge. For example by not including the cost of hiring more staff the store may be in line for a shock, even if sales do increase.

The cost-benefit analysis will also need to look at future costs to reduce risk; for instance any plans the city may have for the new street. If they plan to outlaw street parking in the area in four years time then the cost from less footfall will need considering.

On the other hand there may be a plan to freeze taxes in the district, a future benefit to the store in knowing that there are not any increases on the way.

What is cost-benefit analysis? FAQ

What is meant by cost-benefit analysis?

Cost-benefit analysis is a technique used to evaluate the total expected cost of a project, compared to the total expected benefits in order to determine whether the proposed project is worthwhile. This technique helps to identify potential benefits and costs of a project, and can help to ensure that resources are allocated in the most efficient manner.

What is a cost-benefit analysis example?

A cost-benefit analysis example would be a company deciding whether to invest in a new computer system. The company would need to consider the costs associated with the purchase and implementation of the system, such as the cost of the hardware and software, the cost of training personnel to use the system, and the cost of any additional services required. The company would then need to consider the potential benefits of the system, such as increased efficiency, improved communication, and greater customer satisfaction. After weighing the costs and benefits, the company can then decide whether the investment is worth the cost.

What is a cost-benefit analysis and why is it important?

Cost-benefit analysis is a method used to assess the potential costs and benefits of a project or policy. It is important because it allows decision-makers to compare the expected costs and expected benefits to determine whether the project or policy is worth pursuing. Cost-benefit analysis can help identify the most cost-efficient way to achieve a policy goal, or determine whether the benefits of the proposed project outweigh the costs.

What are the 5 steps of cost-benefit analysis?

  • Define objectives: Identify the goals and objectives that the cost-benefit analysis is intended to address.
  • Identify alternatives: Brainstorm and list all the potential options that could be used to achieve the defined objectives.
  • Estimate costs: Gather data and estimate the costs associated with each potential option.
  • Estimate benefits: Gather data and estimate the benefits associated with each potential option.
  • Compare costs and benefits: Compare the estimated costs and benefits for each option and select the option that offers the most benefit for the least cost.