Performing A Cost Benefit Analysis Will Help Improve Strategic Planning

Are you currently considering completing a cost benefit analysis? This process is extremely helpful when you are trying to determine if a project will be a sound investment or when you're trying to decide which of two projects will produce better results. With this type of analysis you'll compare the price of each option overall with the expected benefits. Your goal would be to see which project has benefits which outweigh the costs and how much of a difference exists between the two.





This type of analysis is different from one that looks at how cost-effective a project is. Here the costs and benefits are expressed in dollar amounts. This enables these amounts to be adjusted with time in terms of time value for money. When this method is used, all benefits and project costs can be looked at with regards to the present value. Be sure you don't confuse this accounting method with economic impact analysis, cost-utility analysis or Social Return on Investment analysis.





Business and governments make use of cost benefit analysis to find out if a project should be completed or perhaps a policy implemented. If this technique is used, many factors are considered. Foregone alternatives are just one factor that is considered to determine if a policy will be effective. Here the status quo may also be examined to see if keeping things how they are would be better.





When you use this process of analysis, you are able to better select which projects will produce the best results at the least cost. Be aware that, when used for social welfare projects, there's no foregone conclusion. Many other factors may play a role on this like human behavior so the analysis is more of a best guess. It is possible to put a program into place, however, you can't force people to utilize it if they do not want to.





In order to complete a cost benefit analysis, there are specific steps that must be taken. First a list of projects to be compared must be completed after which key players should be determined. Determine how you'll measure costs and benefits and collect this data. You'll then need to look at the complete project and predict the outcome of the costs and benefits.





Costs and benefits should be put into dollar amounts when doing this type of analysis. If a discount rate exists, it should be applied before you calculate the net present value of the various options. Finally a sensitivity analysis must be done before recommendations can be created as to which project or projects should be chosen.





When completing a cost benefit analysis, you need to examine any risks that could develop as a result of selecting a particular project. Probability theory can be quite helpful here. Factor this into the discount rate or use it separately. The choice is up to you, but make certain your focus is on risk aversion.





A sensitivity analysis must also be done. This shows how, if parameters are changed, the outcomes may also change. There are lots of ways to complete this step and you will really need to choose the one that's best for the needs you have.



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