Imagine you have just started a new project. The workload has increased and your people are working hard to finish the project on time.
Cost-benefit analysis and how can it be used.
You were wondering if you should hire a new member for your group. The decision is not easy. There are many things to consider, and this is where cost-benefit analysis comes into play.
CBA or cost-benefit analysis is a quick and easy way you can use to make insensitive financial decisions. Other approaches, such as using net present value and internal rate of return, are often more appropriate when deciding on critical missions or involving large sums of money. Cost benefit analysis and how can it be used.
About tools
The French engineer and economist Jules Dupuit introduced the concepts of the CBA in the 1840s. These concepts became popular in the 1950s as a simple way to measure the costs and benefits of projects, and people used those concepts to determine whether to pursue a particular project.
As the name implies, cost-benefit analysis is the calculation of the benefits of a series of activities and then comparing them with the associated costs.
The results of this analysis are often expressed as a refund period. That is when these benefits are needed to recoup their costs. Many people who use this method seek repayment in less than a certain period (for example, three years).
You can use this method in many different situations. for example:
- Deciding to hire a new member for the group.
- Evaluate new projects with changes in initial steps.
- Possibility of return on investment to purchase new equipment.
- Keep in mind that this method is great for quick and easy financial decisions. Broader approaches are often
- used for more complex, critical, and costly decisions.
Step # 1- Discovering Your Purpose.
Take the time to first list all the costs associated with this project with a brainstorming session. Then do the same for all the benefits of the project. Can you predict the unexpected cost? Are there benefits you may not have anticipated in the beginning?
Once you find the costs and benefits, think about the length of the project. What are the potential costs and benefits of taking too long?
Step # 2- Discovering Your Purpose.
We mean the costs, the costs of the physical resources required, as well as the costs of the human resources involved in all stages of the project. Costs (compared to revenues) are often easily, relatively easily estimated. Cost benefit analysis and how can it be used.
You need to think about the costs as much as you can. For example, how much will training cost? Will productivity decrease when people are learning a new system or technology? How much does this reduction in efficiency cost? Cost benefit analysis and how can it be used,
Think about the costs that will continue after the project is completed. Consider, for example, if your team needs in-service training, or if your workload increases, will you need more staff? Cost benefit analysis and how can it be used
Step # 3- Discovering Your Purpose There is no such thing as a “value for money”
This stage is more ambiguous than the previous two stages. Because:
It is often difficult to accurately predict revenue, especially for new products.
In addition to the financial benefits you anticipate, there are often intangible or quantitative benefits that are important project outcomes.
For example, what is its impact on the environment and employee satisfaction or their health and safety? What is the monetary value of that effect?
For example, is the preservation of an ancient building worth 500 million tomans, or is it worth 5 billion tomans because of its historical significance? Or how much is it worth to go to work in the morning without danger and stress? Here, it is important to consult with other stakeholders and decide how to value these sensitive items. Cost benefit analysis and how can it be used.