Cost Benefit Analysis
A cost benefit analysis is important because it can help us decide what would be the total expenditure on a particular project along with the expected returns from the project. From a cost benefit analysis, it is easy to decide whether implementing the project will be a profitable deal for the organization or not. It is through the examples of this process that we can get a clear idea of how to proceed with this calculation.
As said above, a cost benefit analysis involves identifying all the costs and benefits which you would make from a project. Then, once this is done, you can get to know what your profit would be by subtracting the total cost from the total benefit. If this number is positive, then it can be said that you have been successful in your business strategies. In case the costs are more than the benefits, you need to change your strategies to bring your venture into a profit making one. However, the main question is – how to calculate the grand total of the costs and the benefits?
In order to count the total costs, what you can do is just prepare a list of all your monetary expenses one after the other. Make two columns – particulars and cost. In the particulars column, write the description of what material you are buying and mention its cost in the cost column. Ideally, your particulars can include raw materials, licenses, employees, transportation, training etc. You should also include non monetary costs such as production losses and assign them values. Now, add all the costs to get the total cost. After calculating the costs, it is now the time to calculate the grand total of benefits. Again, make two columns namely particulars and benefits. The benefits from your business can be in the form of direct profit from selling your goods and services or increased investments from your investors or shareholders. Benefits from the sale of assets should also be added. Now, add up all the individual benefits which will give the total benefit.
After your analysis is over, you will have to discuss several aspects of the business with your business partners. If you find that costs are more than benefits, think of some ways of reducing production costs to save money. A reduction in the employee cost can always increase your profitability. Decision-making abilities are a must for effective cost benefit analysis.
Suppose you’re planning to start a software programming training institute. So, in this case, you will need space on rent, several computers, faculty members to teach students, electricity and members to entertain inquiries at the reception. You need to assign monetary values to each of these needs and add them up to get the total cost. The total benefit for your institute can be calculated by multiplying the fees you will be charging by the number of students studying the courses. At the end, subtract the costs from the benefits to get the profits. You can also determine the break even point which is that period which you take to recover all your costs.
I hope this example of cost benefit analysis will help you to know the concepts of cost and benefit well. So go ahead and get the calculations right to understand how profitable your business will be.