Business Management Insight: How a Cost-Benefit Analysis Works
Proper cost-benefit analyses can improve your management of big decisions.
Life is full of big decisions. That’s even more true in business. It’s not uncommon for a business to have to decide whether to purchase new office equipment, open a new location, hire a new employee, or carry a new product line. How do you know if a big investment has the chance to pay off? One of the most popular ways for a business to answer this question is through a cost-benefit analysis (CBA).
A CBA is a business management technique that allows you to weigh the costs associated with an investment against the benefits the investment is likely to generate. Whenever you’re unsure whether to make a change in your business, a CBA can help guide you through the decision-making process. Here’s how CBAs work.
CBAs Measure All Tangible Costs
The first step in any CBA is to calculate the monetary costs associated with the proposed investment. Costs should not be estimated unless they absolutely have to be. Instead, to properly calculate the cost side of a CBA, you have to itemize every cent that will go into the investment.
For example, let’s say you are trying to decide whether to move your business into a bigger warehouse. For your CBA, you wouldn’t just use the additional monthly cost of paying for more space. You have to consider the moving costs, the costs of breaking a lease or selling your current space, the cost of new employees to work in a larger space, the costs of purchasing and transporting the new products you will presumably stock in the larger space, the cost of the interest the business could have earned if you put the money into the bank rather than spending it on a new space, etc.
Determining costs is not something that can be done quickly, or something that’s easy to do for those without proper management training. In fact, a number of experts in the field hold a doctorate in business.
They Measure All Intangible Costs, Too
Once you itemize all tangible costs, you’re still not finished. There are almost always intangible costs to consider. These are costs you will have to estimate. In the case of moving to a larger warehouse, you’ll want to consider such intangibles as the cost of the time it takes to complete the move vs. the money you could have made if you were focused on other tasks, the costs of any productivity slowdown that may occur as the workforce adjusts to a new space, the cost of any lost business that might result from having your warehouse stock in transit rather than being shipped to customers, the potential costs of any injuries that might occur as a result of the move, etc.
They Estimate All Benefits
Once you have all the costs determined and itemized, you can begin assessing the investment’s potential benefits. As with the costs, you will want to itemize all benefits. In the warehouse example, you are presumably seeking more space because demand for the products you carry is outpacing your supply. So, the primary benefit you would calculate would be the increased earnings associated with selling more product. But you can’t stop there. In this example, you will also want to consider such benefits as any efficiencies the new space might provide, any savings in transportation costs the space may offer if it’s better located, any savings in utilities the space may generate if it’s more energy efficient, any reduction in labor costs you may enjoy if the new space is in a market with lower wages, etc.
They Calculate Payback Time
Just because you know what the costs are and what the benefits are likely to be doesn’t mean you know whether an investment is actually worth it. To know that, you have to calculate the ways that the costs and benefits will be spread out. For example, in the case of the warehouse, it wouldn’t matter that you can double your profits after 1 year if you can’t afford the payments on the new space for more than a few months. Typically, the faster a project pays itself off, the better. By calculating payback time, you can determine if the costs will be manageable as you wait for the benefits to take hold.
They Help You Make a Decision
Once you complete a CBA, what began as a hard-to-make decision should be a lot easier to make. If you’ve done the work properly, you should have a very good sense as to whether a proposed investment will be worthwhile.
How Can You Learn More About CBAs and Business Management?
If you want to learn how to use higher-level analysis—like CBAs—to improve your business, you should consider earning a doctorate in business. Two business degrees you might want to look at are a Doctor of Business Administration (DBA) and a PhD in Management. Offered by some of the best business schools, both of these degree programs can give you the advanced skills you need to address business management and administrative decisions with a truly analytical approach.
Thanks to online universities, earning an advanced degree is more possible than ever before. When you enroll in an online DBA program or an online PhD in Management program, you will enjoy the convenience and flexibility you need to stay at your job and in your current location. Being able to earn a degree without upending your life is one of the reasons online education is such a great choice for working professionals.
Cost-benefit analyses are just one of the many advanced ways to analyze business. You can learn about them and the many other ways to look at business with an online DBA degree or an online PhD in Management.
Walden University is an accredited institution offering both an online Doctor of Business Administration (DBA) degree program and an online PhD in Management degree program. Expand your career options and earn your degree in a convenient, flexible format that fits your busy life.
Walden University is accredited by The Higher Learning Commission, www.hlcommission.org.