While making decisions and evaluating projects, we always need a systematic approach to contrast all the advantages and drawbacks. Cost-benefit analysis is this useful tool that can show us whether the input is worth the result. It is frequently used for evaluating non-critical financial decisions. The tool became popular soon after it was introduced in the 1940s. Its essence lies in comparing benefits from the project in question with costs spent in the course of its implementation. The result of CBA is measured as a time that will be necessary to repay costs for the project.
To conduct CBA, businesses shall count all the costs involved in the project and predict possible outcomes first of all. They shall also anticipate any unexpected costs and additional benefits as close as possible. It sounds quite easy, however, this method is full of unexpected subtleties. The costs used in the input are not only monetary value of premises and raw materials; they also encompass human resources. During the research, businesses always count how much does their staff as well as training cost. The material value of project benefits is not clear either. Most of them also include soft and intangible benefits such as improving environment or employee satisfaction, which cannot be precisely estimated in a monetary equivalent. And finally, managers set the duration of the project.
Cost-benefit analysis is a sound way for businesses to estimate their power. Being ambitious is good for entrepreneurs, but they need to remain realistic about what they can allow themselves in terms of money or time and what they cannot.