Why Cost Benefit Analysis Is Critical To Business

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October 15, 2018

Why Cost Benefit Analysis Is Critical To Business

Why Cost Benefit Analysis Is Critical To Business

Are the actions you’re taking worth the cost? That’s what is at the heart of a cost-benefit analysis. The thousands of decisions we make on a daily basis can have long-term consequences and benefits to your business. While most of these are inconsequential, big decisions shouldn’t be left to your intuition.

A cost-benefit analysis can be done to not only assess the monetary cost of a new project, but also calculate certain intangible items such as location and opportunity cost. Understanding the full cost of a new endeavor makes it much easier to decide if the benefit is great enough to proceed.

Cost Analysis Benefits:

When performing a cost-benefit analysis, the more factors that can be considered, the better. Benefits should include all direct and indirect revenue sources as well as the intangible benefits such as:

  • Increased production capabilities
  • Improved employee safety
  • Increased sales from customer goodwill

By carefully observing and analyzing all possible costs and benefits associated with a project, you can properly determine whether it makes sense to move forward or to step back and review the project. If a review is needed, you can determine if there are adjustments that could be made to either decrease costs or increased benefits. If none of those conditions can be met, scrapping the project is usually the most viable options.

Profitability Analysis Is Just As Important

A cost-benefit analysis is a great tool to determine whether a project is financially viable. If you reach a decision to proceed when the benefits the costs, a profitability analysis is your next step. A profitability analysis can predict sales and profit potential among several factors including location, age groups, or product types. The resulting information can be used to make important decisions such as:

  • Eliminate products that create a loss
  • Reduce costs for loss-making customers
  • Increase sales in profitable segments

A cost-benefit analysis can give you the yes or no, but the profitability analysis will show whether the proposed project has long-term viability.

A cost-benefit analysis is a critical component for long-term success in your business and BIG can help get you there with our team of experienced professionals.

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