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A Basic Guide for Managers and Leaders: How to do a Cost Benefit Analysis

What is a Cost Benefit Analysis

It is a tool used to more objectively assess:

• the value of a solution or action
• the comparison between alternative solutions or courses of action

For our purposes, it does not include detailed financial analysis

When to conduct a Cost Benefit Analysis

• To determine feasibility of a solution or course of action
• To compare alternative solutions or courses of action
• When you are justifying a course of action
• When you are looking for more resources for something

How to do a Cost Benefit Analysis

1. Determine the Costs
2. Calculate the Benefits
3. Compare Alternatives
4. Report and Plan Action

1. Determine the Costs

• First you should check to see if any analysis has already been done on your project or idea. Perhaps there has already been some detailed costing work done. If not, you'll need to gather the cost numbers.
• List out costs of your solution or course of action e.g.:

– Initial or capital costs
– Ongoing costs – what are the costs in the coming months or years?
– Labor costs – how much time will your idea take from people?
– Contractor costs – Are there external labor costs?
– Supply or input costs
– Non-monetary costs – what is the impact on safety, morale, reputation and other less tangible things. You may not be able to assess a number to these things, but you should at least list them for consideration.

2. Calculate Benefits

The next step in the Cost Benefit Analysis is to estimate the benefits on all the same dimensions as you did for costs:

• Dollar value of benefits e.g.:

– Time (labor) saved
– Supply (input) savings
– Energy savings

• Non-monetary benefits e.g.:

– Safety, environmental
– Reputation
– Morale, turnover
– Quality

You need to think aboutr the immediate, yearly, and ongoing benefits in your Cost Benefit Analysis.

3. Compare Alternatives

You now need to compare the costs and benefits from each of your alternatives. If there is one alternative, you must still compare your option with the status quo.

• Subtract costs from benefits for each alternative
• First compare against doing nothing
• Compare each alternative with each other
• Take non-monetary into consideration

4. Report and Plan Action for your Cost Benefit Analysis

• Make a recommendation based on your Cost Benefit Analysis
• Put together a brief plan of action for your recommendation.
• Don’t forget about other influencing factors. Sometimes, you may have a compelling argument that still needs to be deferred for other reasons, such as:

– Cash flow
– Availability of resources
– Competing priorities

Improve your leadership skills! Visit www.wilymanager.com for more information about How To Do A Cost Benefit Analysis and more Just-in-Time Management Advice

Watch our video about how to do a cost benefit analysis

Learn Even More About How To Do A Cost Benefit Analysis

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