You can use Cost-Benefit Analysis to decide whether to go ahead with a decision.
Imagine that you've recently taken on a new project, and your people are struggling to keep up with the increased workload.
You are therefore considering whether to hire a new team member. Clearly, the benefits of hiring a new person need to significantly outweigh the associated costs.
This is where Cost-Benefit Analysis (CBA) is useful. We'll look at how you can carry out Cost-Benefit Analysis in this article.
Jules Dupuit, a French engineer, first introduced the concept of Cost-Benefit Analysis in the 1930s. It became popular in the 1950s as a simple way of weighing up project costs and benefits, to determine whether to go ahead with a project.
As its name suggests, Cost-Benefit Analysis involves adding up the benefits of a course of action, and then comparing these with the costs associated with it.
The results of a cost-benefit analysis are often expressed as a payback period – this is the time it takes for benefits to repay costs. Many people who use Cost-Benefit Analysis look for payback in less than a specific period – for example, three years.
You can use Cost-Benefit Analysis in a wide variety of situations. For example, when you are:
However, bear in mind that Cost-Benefit Analysis is best for making quick and simple financial decisions. More robust approaches are commonly used for more complex, business-critical or high cost decisions.
Follow these steps to do a Cost-Benefit Analysis.
First, take time to brainstorm all of the costs associated with the project, and make a list of these. Then, do the same for all of the benefits of the project. Can you think of any unexpected costs? And are there benefits that you may not initially have anticipated?
When you come up with the costs and benefits, think about the lifetime of the project. What are the costs and benefits likely to be over time?
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San Jose State University Department of Economics (2012) An Introduction to Cost Benefit Analysis. (Available here.) [Accessed 4 September 2012.]
Griffin, R.C. (1998) The Fundamental Principles of Cost-Benefit Analysis, Water Resources Research, Volume 34, Number 8, August 1998. (Available here.)