What Makes Cost Benefit Analysis Important?

by Jeanne Grunert Google

Nearly every business decision requires a cost-benefit analysis. Such an analysis can point out the risks and rewards of decisions or actions. If you don't do a cost-benefit analysis, you run the risk of taking on unprofitable tasks and wasting valuable time and money. Guessing at the benefits or going by instinct can be a recipe for business failure.

Evaluate Projects

A cost-benefit analysis is used to evaluate the risks and rewards of projects under consideration. It can be used to project the potential benefits of investing in marketing ideas, product development, infrastructure enhancements and operational changes. If all potential costs are tallied accurately and the benefits outweigh the costs, the considered investment may be a good choice.

Prepare Budgets and Sales Projections

The information obtained during a cost-benefit analysis makes budgeting easier. If you have all the possible costs listed, you can project the budget needed to undertake the project. The anticipated benefits can also be used to project sales if they can be quantified into financial goals. Both of these considerations are useful when preparing budgets and sales projections.

Prioritize Investments

Cost-benefit analysis is useful for business owners who must choose among several potential projects. After examining profitable projects for potential benefits, you can prioritize investments, choosing the projects with the greatest benefit and lowest cost to invest in first. In this way, you can achieve the fastest return on your investment and use remaining capital to fuel additional projects.

Establish Goals

Once the benefits of possible projects are understood, they can be used to set benchmarks and goals for the project itself. Quantifiable benefits can be used to set concrete revenue goals. Other benefits can be used to set productivity, time or other management goals. Goals can be set for various types of projects, including marketing, finance, management and human resources.

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