Cost Benefit Analysis

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Topics: Cost, Costs
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.

Definition

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

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