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Small businesses can’t afford to make decisions on a whim without researching and justifying those actions. According to research conducted by the U.S. Small Business Administration in 2018, the average profit margin for a small business in North America is roughly 7% per year.
That doesn’t leave a lot of buffer room for careless mistakes, even if you think your small business could use a brand-new company car or a new set of employee laptops.
That’s why it’s so important for business owners and project managers to conduct a cost-benefit analysis for every major business decision brought to the table.
Just like the name of this process suggests, a cost-benefit analysis is a comparison between the costs and benefits associated with a business action. A cost-benefit analysis will give you a better insight into whether or not an action is worth the investment in the short and long term through evidence-based evaluations.
This cost-benefit analysis is included in the proposal stages of any business undertaking before any project schedule drafting, scope of work developing, or process mapping begins. This is the justification for the action.
This is a non-comprehensive list of the most common reasons for performing a cost-benefit analysis, but if you so desire, you could perform one for just about any decision you make.
We do this every day in our heads when we prioritize some tasks over others or even decide what to have for lunch. However, these are the five most important instances for conducting a cost-benefit analysis for your business.
Hiring someone new is not a decision your business should make lightly. There are many costs, regulations, and processes to consider when hiring someone new. A cost-benefit analysis will provide you with an insight into the pros and cons of hiring someone new versus making do with your current staff, such as workloads, salaries, training periods, etc.
While a cost-benefit analysis is not necessary for every single project, depending on the size of said project, they’re absolutely essential for those destined to eat up a lot of time, money, and manpower. After all, it’s better to go into a project knowing the estimated return on investment than to fly blind into a world of uncertainty with a chunk of company money at your disposal.
Choosing to implement a new software tool is typically a large time investment and monetary expense that requires a lot of preparation and testing. Running a cost-benefit analysis before pulling the trigger on a decision like this will help you avoid any form of buyer’s remorse in the future.
Changing the routines of your business is sort of like changing the plans of your vacation in the middle of your trip, and it should only be done if absolutely necessary.
Conducting a cost-benefit analysis will give you justification and evidence both for and against changing your routines and adopting new business practices that’ll improve production, team collaboration, or what have you.
Your business is like a large ship, and making course adjustments is a slow and costly process as far as energy is concerned. Making a market pivot is a huge decision that must be made with lots of research to back it up. A cost-benefit analysis will provide you with the evidence you need to make such a large decision.
Luckily, performing a cost-benefit analysis is a straightforward and simple process that you can complete in three steps.
This is the easiest step in the process of performing a cost-benefit analysis. All you have to do is list out all of the costs and benefits of engaging in a specific action. If you’re looking to hire someone new, for example, these costs and benefits might include:
Costs:
Benefits:
While your list of costs and benefits might come out lopsided with one side having more items than the other, don’t worry. Your analysis isn’t finished here since you still haven’t assigned any value metrics to these points.
Before you jump into listing these effects, be sure to utilize these tips so you can build the most comprehensive lists possible.
As stated in Step 1, having more costs or benefits doesn’t mean anything unless you assign some sort of weighted value to each point. This value framework usually consists of money, since everything you do as a business will either contribute to or take away from your bottom line.
Assigning monetary values to your costs and benefits in some cases might be easy, such as determining the salary of a new hire or calculating the yearly cost of buying a new software tool.
But what about those points that aren’t as upfront and obvious, such as the time spent training your employees on how to use a software that would otherwise be spent working?
Putting together cost analyses such as these will require some math on your part, such as figuring out the value created through a certain amount of work in a specific amount of time.
This is the most difficult part of the process and it will require some digging to get to the bottom of these values.
Once you’ve assigned values to each cost and benefit, it’s time to evaluate whether your proposed action would provide a positive benefit to your business. In order to conduct this analysis, you’ll need to use the benefit-cost ratio equation (or BCR):
Benefit value sum ÷ Cost value sum = BCR
If your BCR value is positive, then that indicates your action would benefit your business. If the ratio is negative, then obviously the action would be a net loss. Once you’ve determined the net benefit or loss to your business, you can make the decision to either pursue or leave the action behind.
You’ve made it to the end of the process! Here are a couple tips to help you put the final touches on your cost-benefit analysis.
If there is one area we can help you make business decisions in, it’s definitely in software. We are the perfect resource for expert software reviews, how-to pieces, alternatives lists, and beginner guides for all kinds of B2B needs.
If you’re looking for somewhere to start, here are a few recommendations from our project management blog:
Whether you’re looking for a comprehensive list of quality project management tools or you want to learn more about process groups, we have you covered.
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