What is a Cost/Benefit Analysis?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 May 2020
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The cost/benefit analysis is a strategy or formula for evaluating the potential for some type of operation or project within the confines of a company or other organization. Essentially, the purpose of a cost benefit analysis is to ascertain if conducting the project or operation is feasible, given the current circumstances of the organization. As part of this process, the cost/benefit analysis will identify the benefits that can be reasonably expected to be gained from the effort, while also considering the impact on the organization in terms of various types of cost to carry out the project.

Because the cost/benefit analysis is basically a tool that can help an organization side step circumstances that could potentially undermine or even destroy the reputation, integrity, or financial stability of a company, this type of assessment is common to just about every business. The exact methodology for conducting a cost-benefit analysis will vary based on several factors, but the end result can often yield very important information that proves helpful to the ongoing operation.

The most simplistic examples of a cost/benefit analysis involve two simple questions. First, what will be gained by choosing to execute this project or plan? Understanding how the plan will enhance operations already in place, and possibly create new revenue streams or otherwise raise the prestige level of the company will help to determine if the plan is work further consideration. If there appears to be little or no advantages or benefits to implementing the plan, then the analysis may stop at this point and the project not proceed.

However, if there are significant opportunities presented by the project, the next step is to ask what types of costs would be incurred if the plan were implemented. This can include determining if additional labor would be required, or if existing labor would have to be reshuffled in order to handle the added demands of one more project. The financial cost of raw materials necessary for carrying out the approach should be determined. At the same time, the impact of the project on the public relations efforts of the company should be evaluated. If all the associated costs involved indicate that the project will ultimately offset any gains or benefits, the analysis may indicate that no action should be taken until circumstances change.

While a cost/benefit analysis is key to determining the feasibility of a new project, it is usually not the only factor considered. Many worthwhile projects have been undertaken when the cost/benefit analysis indicated the timing was off or that the project had little chance for success. However, most companies will utilize this type of feasibility study and consider the results very seriously before going with hunches or less scientific methods of projecting the outcome.

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