What is a cost benefit analysis?

The cost benefit analysis is used to assess a project's total expenses and the expected amount of income. Based on the analysis, the company can get an overview of whether the project is worth the effort. If the result of this comparative analysis shows that the advantages (revenues) are greater than the disadvantages (expenses), there is a good chance that the project manager will choose to implement the project.

Overall, a cost benefit analysis consists of three parts:

1. Identification of potential expenses – if the project is implemented
2. Identification of the project's potential income
3. A comparative analysis, where expenses are deducted from income, to identify whether the project can be expected to make a profit.

Identification of expenses

The first thing you do is identify and value all the expenses associated with your project. In order to get a fair picture of the project, it is important to identify all of the project's potential expenses. You can do this by following these points:

1. Make a list of all the monetary expenses arising from the implementation. Throughout the life of the project. These can, among other things, include: startup fees, licenses, production materials, salaries, training, travel expenses and many more.
2. Make a list of all the non-monetary expenses that can be associated with the project. Eg. time consumption, loss of production on other tasks, potential risks and impact on the company's reputation.
3. Assign krone and øre values to the expenses you have identified in the previous two points. It is important that all values are stated in current value, to ensure uniform pricing over time. If it is not possible to access realistic prices, you can consult market trends and industry studies to find comparable implementation prices.
4. Add all expected expenses together to find the total expense.

Identification of income

Next, you need to identify and price all the benefits that the implementation of the project is expected to shake off. Follow these points:

1. Make a list of all the income (in kroner and eur) that arises on the basis of the implementation. Both during implementations and afterwards. These revenues include e.g. profit from the sale of products and / or services, increases investor capital, lower production costs due to improved and standardized processes and increased production capacity.
2. Make a list of the income that the project brings that is not financial. Eg. shorter production time, improved reliability and durability, larger customer base, greater market penetration, greater customer satisfaction and improved company or project reputation.
3. Assign krone and øre values to the income you have identified in the previous two points. Make sure to state the income in current kroner here as well.
4. Add all expected income together to find the total value.

Compare expenses and income

The final step in a cost benefit analysis is to weigh expenses and income to determine whether the proposed project is worthwhile. Follow these steps:

1. Compare the total expenses and income. If the total expenses are much greater than the total income, one can conclude that the project is not profitable.
2. If the total expenses and income are approximately equal, it may be a good idea to go through the cost benefit analysis again. Often you will find that not all things are accounted for or some are assigned the wrong value. This is a frequently made mistake in a cost benefit analysis.
3. If the total income is greater than the total expenses, you can conclude that your project is potentially profitable and should be assessed as a realistic option.

Conclusion

Performing a cost benefit analysis is a valuable way to assess the pros and cons of a proposed project. If you are thorough in your selection of income and expenses and assign them the right value, a cost benefit analysis is a precise way to determine whether a given project is worth your company's time and energy.