Often your case study analysis will lead you to recommend new initiatives. It is important when making these decisions that they are fully costed prior to adoption and implementation. A cost-benefit analysis is not an exact science. It requires the decision-maker to incorporate some subjective values into the process. You must consider all of the ‘inputs’ (both tangible and intangible) allocated to a particular course of action. It is imperative that the decision-maker recognize and understand the financial impact of their decisions. See the Little Red Tool Box
Follow these three steps.
- In order to measure both costs and benefits, you must attempt to find a common metric. Most often this is money. Recall the net present value of money must be considered in this analysis.
- Identify each cost that will be incurred in the project as well as each benefit. The costs are generally tangible and will likely include land, labour, machinery, capital, and similar. The benefits tend to be intangible and are related to factors like employee satisfaction, customer satisfaction, brand awareness, enhanced corporate culture, loyalty, and the like. The benefits will require hard thinking to convert these intangibles into some approximate dollar value. With practice, you’ll get better at it.
- Calculate the payback time for the initiative. If the total cost of the project is $100,000 and the ongoing benefits are equivalent to $50,000 per year then the payback is $100,000/$50,000=2 years. How does the payback period (2yrs) compare against competing initiatives for use of the firm’s scarce resources? Which initiative offers the greatest value for money? Undertaking a simple cost-benefit analysis will provide some guidance in determining which initiative or alternative to undertake first.
