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 requesting additional 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

Determine the Costs

• You should first 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 will need to collect the cost numbers.
• List out costs of your solution or course of action:
  • 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.

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:
  • Time (labor) saved
  • Supply (input) savings
  • Energy savings
• Non-monetary benefits:
  • Safety, environmental
  • Reputational
  • Morale, turnover
  • Quality

You should consider the immediate, yearly, and ongoing benefits in your Cost Benefit Analysis.

Compare Alternatives

You now need to compare the costs and benefits from each of your alternatives.  If you only have one alternative, you are still comparing 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

Below is a comparison table for a simple Cost Benefit Analysis.  In the last 4 rows, a dollar figure may be difficult to quantify, so you can put a description of the cost or benefit in each of these areas:

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 conditions.  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

3 Things to Remember About How to do a Cost Benefit Analysis:

1. Non-monetary conditions may have a considerable influence.  Safety considerations, for example, may trump all other criteria in determining action
2. The time-value of money must not be underestimated.  Many people forget that capital has a cost, and if your idea ties up dollars there is a direct cost to this.
3. If it gets complicated, more detailed financial analysis may be more appropriate.  You may need to seek out a finance individual in your organization to assist with your analysis.

Watch the ‘3-Minute Crash Course’ about How to do a Cost Benefit Analysis (CLICK THE ARROW TO START THE VIDEO):

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