Cost Benefit Analysis: A Simple Guide

Cost benefit analysis (CBA) is a common tool used in the business world to help in making key financial decisions.

Should we buy that company? Should we invest in this new product? Should we roll out a new email marketing program?

Doing a cost benefit analysis allows you to take a little of the guesswork and personal opinion out of the decision making process.

In order to do an effective cost benefit analysis, you need to start with a realistic prediction of all the costs and benefits associated with an activity. So if you are thinking about rolling out a new product, you will have costs for market research, design and development, marketing and launch, etc. And you will have benefits – sales of the product.

Once you have them all listed, you must assign a monetary value to them. In our example, that is fairly simple because they all represent real costs and revenues. But you will also want to assign a cost to things that are not so clearly monetary, like time and new technology requirements.

Finally, you simply need to compare the two. If the costs outweigh the benefits, you are in good shape.

Most people will apply a time period to the equation, say one year. That way you can take all costs incurred in the first year, and all benefits, and figure out how long it will take to break even, also called a breakeven analysis.

To do that, you would take your costs and divide them by your benefits. The answer, in percentage terms, is how long you can realistically expect to cover the initial costs.