Cost benefit analysis: why this process is essential for business

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Cost-benefit analysis is an important corporate tool. In addition to allowing a detailed analysis of how interesting a particular alternative is for a business, it also enables the identification of its potential effectiveness compared to other options .

In different corporate sectors such as Marketing , sales and finance, considering the impact of cost on benefits is an extremely relevant measure to identify whether we are taking the helm and steering the ship towards the best decision.

Therefore, cost-benefit analysis interferes in decision-making by estimating the band database potential success of a strategy and its level of impact in the various corporate spheres.

Are you interested in learning more about this fabulous management resource?

So, continue reading this post because we have prepared it especially for you!

Below, you will understand what cost-benefit analysis is about, discover why it is so important for business, and access a step-by-step guide to carrying it out safely and leading you to the best decisions.

All set?

What is cost-benefit analysis and why is it so relevant?
5 advantages of cost-benefit analysis
Learn how to do a cost-benefit analysis by following these steps
What is cost-benefit analysis and why is it so relevant?
One of the main challenges inherent in management is making good decisions .

Often, choosing to follow one path instead of another involves considering a number of factors that are relevant not only to solving a specific situation, but also to the profitability, future and growth of the organization.

Basically, cost-benefit analysis is a procedure that allows professionals to quickly, clearly and accurately verify the level of success of a project , attitude or action, thus detecting whether it is going in the right direction or whether it is time to change its direction.

Also known as Net Profitability Index, this analysis is carried out with the intention of measuring the link between the costs and benefits of a given decision, project or action. It therefore makes it possible to identify whether the investment will, in fact, be effective and provide a relatively quick financial return.

To calculate this index and analyze the efficiency of a decision in terms of profitability, we need to divide the present value of total net income, also known as net profit, by the present value of total costs or investment costs.

That is, B/C = NPV / VAC

As you can see, this analysis involves addressing many variables, among which we highlight:

Operating costs such as salaries and supplies;
production costs;
taxes;
turnover;
financing .
Considering the above points, it is clear that choosing between one or the other alternative must consider the available budget primarily to ensure compliance and the correct flow of operations.

In this sense, it is important that you learn more about the universe of corporate management by reading the following articles:

Business strategy: how many types are there and how to choose the best one for your business
.
What is it, what is it for and how to set SMART goals?
Find out what the deadlines and reasons for return on investment are
.
5 advantages of cost-benefit analysis
In the following lines, we provide you with a list of the 5 main advantages of carrying out this type of analysis:

1. Evaluation based on hard data
When we carry out this type of analysis, we ensure that our decisions are based on reliable information and trustworthy insights, thereby avoiding the incidence of prejudices or personal opinions.

2. Simpler decisions
Commercial decisions are usually quite complex. By analyzing situations from a cost-benefit perspective, we can minimize errors in consideration, be more rational, and develop much more effective and time-appropriate solutions.

3. You discover hidden aspects
Since we have to stop and verify the costs and benefits of a certain project, action, decision or strategy, we are able to broadly understand all the factors that affect each alternative.

4. Allows you to prioritize investments
If a project or procedure is very expensive and does not provide the expected benefits, but the manager believes it is appropriate to develop it at some point, he or she may choose to leave it on standby, prioritizing another less expensive and potentially more profitable option.

5. Detect the viability of a project
Usually, when analyzing the costs and benefits of a given project, we see that it is not worth executing it, since it does not offer a good financial return or requires an investment outside the curve.

Note that understanding whether an action or strategy is valid considering both costs and benefits avoids a large number of problems and inconsistencies such as integrating measures that lead the business to bankruptcy.


Learn how to do a cost-benefit analysis by following these steps
First of all, it is important to emphasize that there is no ideal recipe for doing a cost-benefit analysis, since each area, company or sector has its own particularities and specific needs.

However, there are certain aspects that are shared and should be considered as central elements. Get to know them!

1. Define standards and a comparative framework
If you start analyzing something without having a reference, you will probably end up confused and without a clear idea of ​​what the best path is.

So, before starting the analysis, study the topic related to the research objects and estimate the parameters.

2. Classify the costs and benefits
In this second point, you must classify them according to their typology in:

Direct: related to the production of the product or service;
Indirect: with a fixed nature, they derive from the general expenses of a sector;
Tangible: measurable and quantifiable, relate to an identifiable asset or source such as tools and rent;
Intangibles: These are difficult to identify, such as production levels and public satisfaction;
Real: associated with the production of an offer, these may be raw material and labor costs.
3. Calculate the costs and benefits
After having a frame of reference, it is time to describe both the overall costs and benefits involved in the situation we are analyzing.

4. Compare the costs and benefits
The time has come to compare these dimensions with their references and, above all, consider the time needed for the benefits to pay for the costs, that is, the return on investment or ROI.

5. Check the results and make your final considerations
To take this final step with confidence, you may need to perform a sensitivity analysis to predict outcomes and understand the accuracy of a measure across variables.

So much valuable information, right?

By now we hope you have understood why it is so important and how to implement a top-quality cost-benefit analysis.

Without a doubt, by incorporating it into your routine as a manager, you will see great changes in terms of income generation and profitability.

But to take the profitability of a business to the next level, it is essential to know it thoroughly, mainly in terms of objectives and goals.