One tool that is commonly used by Business Executives is a Cost vs. Benefit Analysis (CBA) for new initiatives and investments. Yet, I find that some entrepreneurs use a less formal approach to making decisions about their business. While I’m all for using your intuition and taking risks, there is true benefit to determining the actual cost and comparing it to the expected benefits of a project, new product launch, etc.

What is a Cost vs. Benefit Analysis?

Simply put, a Cost/Benefit Analysis calculates the expected cost of implementing a new initiative (a technology, event, product, new policy, etc.) and weighs it against the expected benefits that the initiative will result in. A CBA uses both quantitative and qualitative information to determine if the benefit outweighs the initial and ongoing cost of a project. While CBA is usually done for financial questions, I find that it can be helpful for many decisions I need to take in my business.

Why might I need to show the cost vs. benefit of a new initiative?

  • You want to decide whether to launch a new product or service.
  • You are trying to get funding from investors or creditors.
  • You want to show the value of a product or service to a potential client.
  • You want to determine if a new project is sustainable for your organization.
  • You are thinking about implementing a new technology system that can automate some of your work.  

Assessing an initiative by using CBA as a tool is a great way to bring structure to the way you make business decisions. It can be very important for entrepreneurs who have a track record of casually investing their money or time into things that don’t serve their organization in the long run.

Conducting a simple CBA

I. To conduct a CBA, you first determine all of the expected benefits (both financial and non-financial) of your new initiative. This includes things like:

  • Expected income: how will the initiative bring in new or increased revenue?
  • Reduction in costs: where will you actually spend less money because of the initiative?
  • Decrease in time you’ll spend on related activities: what is the cost of your time or your staff’s time?
  • Improvement to your customer offerings: what is that worth to the client? Will you retain clients longer or obtain new clients? 


II. Next, you determine the expected costs. Costs include:

  • Financial cost: How much the initiative will cost - both initially and over time?
  • Time: Will it take time and/or resources to implement?
  • Training: Will you, your staff or your clients need training? 

If you need a more in-depth analysis, you may want to consider calculating the pay-back period. This is the amount of time it will take to recover your initial cost. For example, if you invest in a new technology that costs $20,000 up front and saves you $5000 annually, then your pay-back period is 4 years. At this point, you want to be sure that the new technology you’re investing in will benefit you for more than 4 years. 

III. Finally, you compare the benefits against the costs and use it as a decision making tool.
One thing to remember is that your gut intuition is not to be ignored. No matter what the numbers say, make sure to take a step back and feel into what is right for you and your organization.

Entrepreneurship generally means you are going to have to take some risks and you can’t always calculate the outcome. This is when it becomes really important to be clear on your vision for your business and ask yourself, “Is this initiative aligned with my vision?” If the answer is no, then it won’t make sense to spend the time conducting the CBA.

As a business owner, I like to have concrete tools that help me to run my organization and provide structure for me to flow within. A CBA is one of these tools - it provides a system to help me make decisions and questions any assumptions I have. I encourage you to try out this tool and see if it helps you. You can keep it very simple by just scratching down some numbers on your notepad. Or, for really big decisions, you may want to hire someone to help you conduct a thorough CBA. The important thing is that you are aware of this tool and have it when you might need it.

Good luck in all of your future business decision making!

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