What is cost benefit analysis? – Simple definition
A cost benefit analysis is an analytical process to estimating all costs associated with project, and comparing costs to determine benefits from proposed business opportunity. Actually, CBA is systematic approach to calculating involved costs to determine project will get benefit, which may be expecting to exceed costs over the project life cycle.
Simply the cost benefit analysis helps to decide whether project will be beneficial or not. The analysis may include estimation of all costs which are associated with project. It may compare the condition should be total benefits over total costs. The positive results will drive the project for implementation from initial ideas. Normally it’s may deal with quantitative results for deciding whether to go ahead with project.
What is the Purpose of the Cost Benefit Analysis?
Cost benefit analysis is a financial technique that use to determine if the project should be undertaken. Naturally, the project will go ahead or not, that decision is take on base of analyze the condition should be, expected benefits must exceed over the costs. There are some extract benefits that can be center of purpose are:
- To determine if the project should be undertaken.
- Priorities for approvals of projects is one of the reasons for the CBA.
- As financial concern, the CBA may help to understand if the venture is feasible and reasonable for costs beneficial.
Normally, to defining the purpose can help to determine what costs and benefits should be involved, as well as other aspects of the analysis. At the different industrial segments, governments or any business needs to may have to define an own purpose. Hence the team members may get the actual understanding about the requirements of this analysis and business needs.
Process of Cost Benefit Analysis – [ How to make – steps of CBA preparation]
This process can be used to evaluate the identify total cost of a project compared to the expected benefits. To get accurate and correct estimation of the costs and expected benefits calculation are not easy as normally we think. To accurate estimation can we get through effective process that used for entire process. Here are some points that may help to execute the process accordingly:
Determine the life cycle of the project
It is very important to describe the entire project life cycle in time frame. Accurate time frame will be help to determine the accurate estimation of total costs. Normally it may describe in time period. Even, project life cycle may include so many things more than time frame.
This is initial stage of the cost benefit analysis may need to establish framework to understand the cost of status quo. You have to carefully measure specify each policy and program that provides a basic framework for the analysis process.
Estimate costs for life cycle of the project
You have to identify cost for the full life cycle of the project. The collection of data from the actual costs may enable the estimating total costs of the project. The simple steps that help to identify costs and benefits are as below:
In the section of identification of all potential costs, those are needs to calculate for the project implementation. Even, you have to also identify some hidden costs normally not comes in state form. The monetary costs that can be possible with on initial stage of project, such as startup fees, payroll expenses, licenses, raw materials, process materials, equipment costs, etc. There are also some of the non-monetary costs are needs to include such as process mistakes, risks, market saturation, influences etc.
Once complete the process for identification of costs associated with project. Needs to identify benefits and quantify those all to determine the proposed business opportunity. First of all, you have to make list of all monetary benefits that comes through direct profits, such as product decreased production costs, increase contributions from investors and increase production capabilities may include in the list. Even, non-monetary benefits may include increased reliability of the organization, durability, minimized manufacturing cycle, improvements in customer feedback, etc.
Evaluating of – Costs & Benefits
Now the analysis process is on stage where needs to take the procedure for the evaluate of costs and benefits. Here two got two different values from previous steps these are total costs and total benefits values. Simply the total values of benefits exceeding over the total values of costs that mean the project will be beneficial.
Review calculations of values and totals
Confirm calculated totals & values make sense for estimated costs and benefits for the life cycle of the project. you have to review all the values the made with specific currency for calculations. Even the calculation ratio range should be maintained.
Cost Benefit Analysis examples – Templates & Formats free download
Cost Benefit Analysis Template
This cost benefit analysis template gives a simple solution for index and calculate – recurring and non-recurring costs, even it calculates sum of benefits and other revenues. It may calculate for single annual, three years or five years. The template may include All quantitative costs & quantitative benefits for identify project possible profit.
A Cost and benefit Analysis Template
This is the simple and very useful cost benefit analysis template may help you for take business decisions in an effective way. The template may include overview and background of project (you have to provide a brief overview, background and definition for the project. and second is list of alternatives (Here in you have to provide a brief overview, background and definition for the project).
Free Cost Benefit Analysis Example
As you can see the cost benefit analysis template is specifically designed for the identify costs & benefits associated with project. This template may include description of the costs & benefits details, capital costs, years depreciated over, other setup costs, annual cost revenue and capital.
Business Cost Benefit Analysis Format
The comprehensive cost benefit analysis format design is specifically made in excel application. The format provides a description with tables & auto calculated figures. It may help you to manage overall details related to costs & benefits analysis. The template you can use as reference for your own cost and benefits analysis process. This may definitely help you to gives a guidance that will help for your business.
Examples of Cost Benefit Analysis Worksheet
If you own small scale or medium scale business and have requirement of establish cost benefit analysis for your business needs. Than the excel based cost benefit analysis may help you to organize your information with sufficient way. This is the systematic and structural format that can gives a perfect handling and control over your data. The template may include cost & benefits calculation and also helps for making a right decision for your business.
Simple Cost Benefit Analysis Sample
This is sample format for the cost benefit analysis which may use for the take decisions for selection of right project among different projects for that purpose. Even, the sample format can help to calculate, describe and get outputs, as well as facilitate for compare different projects. Actually, this format is objective-based template will be focus your objective and its outcomes to define well organized management.
What Makes Cost Benefit Analysis Important to a business?
When I was in school, I learned this sentence:
“Money is pivot and all economic activities are around the cluster”.
At time a was not completely understand the meaning of this great sentence. But now I see the day-by-day economical activities are being in center of all activities.
Oh! yah, it is naturally, it really obvious. When we talking about the business, it never should be surprising it may entire “KARMA” on finance basis.
The concept behind the cost benefit analysis is financial profit. Obviously is may give a estimation of possible benefits from the future project. Hence, it is very important for the business to analyze the project before in action to understand future benefits from project. Here are some of the importance that making a cost benefit analysis more important:
To determine if the project should be undertaken, a cost benefit analysis may help to evaluate the possible risks & benefits of project. It may be cover potential benefits of product development, resources enhancements, base processes (operational) changes, and market related ideas. if all potential benefits are exceeding over the costs, then its indicates green single for go ahead with project improvement.
Simplify complex business decisions
It is obvious that the main purpose of the cost benefit analysis is to help the business to take complex decisions. The fundamental of the cost benefit analysis is its simple frame works. It calculates for each project with similar method that is – Total benefits, minus total costs, that is net benefits.
Objective-based instead of bias
Every business has a similar issues related to bias. It can be possible business owner; directors or manager can emotionally have attached with any project that have not more appreciated profit. Cost benefits analysis will help to prioritize project on base of benefits to business. Hence, management can take the right decision on right time. That may be helps to eliminate emotional element and provides a best option for business profit.
Budgeting and sales forecast
Some of the information that can be possible to collect from cost benefit analysis. That information may be related to overall costs and overall benefits. In line with project budgeting requirements, detailed costs can be based of it, and even figures for the sales is easy to sales forecast from project benefits records.
Setup the targets
As you know the cost benefit analysis help to estimate the project benefit from overall business processes. Even it is simple to find out the total cost of project with sum of individual costs at from various expenses, but it is hard to predict benefits. The fact behind the benefits can be simply estimation of the project frameworks. But overall views can be different such as product performance in market at actual time. However, there are option to setup the target with possible lower. Which may help to follow up accurate possible revenues from the market.
Cost Benefit Analysis Example
The cost benefit analysis is one of the key tool that use to analysis financial benefits from the project. Here as below you can see the instant example that will help you understand how to find out cost analysis ratio. Even find overall project costs and benefits. See the example for more details:
A business wants to start manufacturing product. But it having a three different process projects ideas. Business want to quick decide which project is beneficial for the business. Hence, business started cost benefit analysis for these three different ideas.
On after calculations, business got the total costs and benefits for all three ideas. As you can see in below table. Even, the cost benefit ratio are also calculated on base of formulation.
Cost Benefit Analysis Formula & example Table
Cost Benefit Ratio = Total Benefits / Total Costs
See example table:
|Cost Benefit Analysis Example|
|Projects / CBA Details||Project A||Project B||Project C|
Simply this tool may helping to decide that which idea makes the most sense from a financial point of view. Obviously, analyst will be select “Project C”, which is more beneficial for the business.