What is the purpose of a cost benefit analysis?
A cost-benefit analysis (CBA) is an analysis used internally to evaluate all the potential costs and revenues a company might generate from a project or opportunity. The outcome of the analysis will determine whether the project is financially feasible or if the company should seek other opportunities.
A cost-benefit analysis should also factor in the opportunity cost into the decision-making process on whether to take or pass on a project.
Who should use this free cost benefit analysis template?
Cost-benefit analysis is used to understand how much a project benefits a business after all the costs are considered. Any business that is comparing different projects to undertake should use the cost-benefit analysis template to choose the one with the biggest positive impact.
In particular, project managers, marketing teams, executives, and research and development teams should use cost-benefit analysis in their day-to-day work to pick the most impactful tasks to be done.
Why should businesses use a cost benefit analysis template
Businesses should use a cost benefit analysis (CBA) template for several reasons:
- Cost control: A cost benefit analysis template encourages businesses to identify unnecessary costs and streamline processes.
- Resource allocation: With a cost benefit analysis template, businesses can allocate their resources to projects that offer the highest return on investment and align with strategic goals.
- Risk assessment: A cost benefit analysis template can help identify and quantify potential risks associated with a project, enabling businesses to implement risk mitigation strategies in advance.
- Long-term planning: Cost benefit analysis templates can help businesses evaluate whether benefits will outweigh costs over time and make informed decisions for sustainable growth.
When should a business use cost-benefit analysis?
Cost-benefit analysis is best used when it’s unclear whether a project will be a net positive for the business or when trying to choose the project with the most positive impact.
Some examples of when cost-benefit analysis informs decision making include:
- Choosing what new product or service to develop
- Deciding whether to open up a second location or new branch of business
- Choosing marketing campaigns for the quarter
- Considering a merger or acquisition
- Changing processes or workflows
What are the three components of a cost-benefit analysis?
Cost-benefit analysis can be broken into three main components:
- Costs are the financial and non-financial costs associated with the project. Examples include the direct costs, the allocated overhead costs, and the time investment to bring the project to completion.
- Benefits are the positive financial and non-financial impacts of the project once it’s completed. Examples include future revenue, improvement in morale, and increase in workplace efficiency.
- The conclusion is the final component. This is the final result of your cost-benefit analysis, typically being the choice you make once the costs and benefits are all tallied.
How to prepare a cost benefit analysis template in Excel
If you run a business or just want to make thoughtful financial decisions, consider calculating the cost-benefit analysis of changes you are thinking about implementing. Just follow the steps in the Excel template and you’ll have the information you need to make a thorough analysis. Here’s how to do a cost benefit analysis in Excel:
Step 1: Download cost benefit analysis template.
Step 2: Enter project information (company name, project name, project manager, start date and more).
Step 3: List out known expenses needed for the project.
Step 4: Input current pricing per listed expenses before starting the project.
Step 5: Input estimated new price after starting the project.
Step 6: Calculate future value by inputting present value of the project, interest rate, and project duration.
Step 7: Input the expected fiscal year return.
A dashboard will automatically populate from data entered into the cost-benefit analysis template. You can find more detailed instructions on how to use our cash benefit analysis template upon download.
What information does a cost benefit analysis template include?
A simple cost benefit analysis (CBA) template typically includes the following information:
- Project Description
- Timeframe
- Costs
- Benefits
- Interest Rate
- Net Present Value (NPV)
- Return on Investment (ROI)
Cost-benefit analysis FAQ
What should be considered in a cost-benefit analysis?
When you sit down to perform, you should ask yourself the following questions:
- What are the project goals?
- What does the historical data show about similar projects in the past?
- Who are the stakeholders involved and what expertise can they provide?
- What is the project timeline?
- What are the potential costs?
- What are the potential benefits and the probability of them being realized?
- What is the present-day value of the potential benefits?
What is the cost-benefit ratio?
The cost-benefit ratio is a way of measuring how beneficial a project could be when comparing the costs and benefits.
The formula for the cost-benefit ratio is:
Cost-benefit ratio = Total present value of benefits / Total costs
If the cost-benefit ratio is greater than 1, the project is considered to be net beneficial. But if it falls below 1, the project’s costs outweigh the benefit and it shouldn’t be pursued.
Cost-benefit ratios are a great way to compare projects against each other. If one project’s ratio is higher than the other, then it’s the one with a higher net benefit.
What are the limitations of cost-benefit analysis?
While cost-benefit analysis is valuable in decision-making, there are some limitations to consider when using it:
- Quantifying intangible costs and benefits: Not all costs and benefits are clearly measured. Putting a monetary value on something like employee morale, brand perception, or customer happiness is difficult, but these considerations should still be included.
- Building off of assumptions: Ultimately, cost-benefit analysis is built off of projections and assumptions that may not be true. Using overly optimistic or conservative assumptions could push you in the wrong direction.
- Calculating the present value: The present value of the costs and benefits requires “discounting” the values into a present day value using a discount rate. Picking the wrong discount rate could sway your decision-making.
- Accounting for all costs and benefits: Unexpected costs or benefits may pop up over the course of the project. It’s always possible for one factor to get overlooked in the analysis.
- Potential manipulation and bias: Certain stakeholders may favor a certain project and use assumptions and projections that push the business to choose their preference.
What is the difference between a risk analysis and a cost-benefit analysis?
Cost-benefit analysis and risk analysis are used in the decision-making and planning process for future projects.
Businesses use cost-benefit analysis to understand whether a project will be a net positive. If the benefits outweigh the costs, the project is worth taking on.
Risk analysis is used to identify the potential risks of a project, their probabilities, and possible impacts. Throughout the risk analysis process, the business looks for ways to mitigate or manage the risks to minimize their impact.
It’s possible to use risk analysis as part of the cost-benefit analysis process. You can estimate the cost of a risk by looking at its financial impact and the probability of the risk being realized.
