“The best cost-benefit analyses take a broad view of costs and benefits, including indirect and longer-term effects, reflecting the interests of all stakeholders who will be affected by the program.”

Economic and Business Analysis is like performing a check-up on a business: it assesses internal conditions, external influences and provides recommendations for improvement. The ultimate goal of economic and business analysis is to determine if a business is allocating its resources in the most effective manner. While Cost-Benefit analysis exercise can be an important component of ensuring the right governance is in place for decision-making.

Why Use Cost-Benefit Analysis?

To support decision making because it provides an agnostic, evidence-based view of the issue being evaluated—without the influences of opinion, politics, or bias.

What is the cost-benefit analysis? – Simple definition

A cost-benefit analysis is an analytical process to estimating all costs associated with the project and comparing costs to determine benefits from the proposed business opportunity. Actually, CBA is a systematic approach to calculating involved costs to determine project will get benefits, which may be expected to exceed costs over the project life cycle.

Simply the cost-benefit analysis helps to decide whether the project will be beneficial or not. The analysis may include estimation of all costs which are associated with the project. It may compare the condition should be total benefits over total costs. The positive results will drive the project for implementation from initial ideas. Normally it may deal with quantitative results for deciding whether to go ahead with the project.

FINANCIAL (COST) BENEFIT ANALYSIS

Vs.

ECONOMIC BENEFIT ANALYSIS

Vs.

SOCIAL BENEFIT ANALYSIS

What Makes Cost-Benefit Analysis Important to a business?

• Evaluate Projects

                To determine if the project should be undertaken, a cost-benefit analysis may help to evaluate the possible risks & benefits of the project. It may be cover potential benefits of product development, resources enhancements, base processes (operational) changes, and market-related ideas. if all potential benefits are exceeding the costs, then it indicates green single for the go-ahead with project improvement.

• Simplify complex business decisions

                It is obvious that the main purpose of the cost-benefit analysis is to help the business to make complex decisions. The fundamental of the cost-benefit analysis is its simple frameworks. It calculates for each project with a similar method that is – Total benefits, minus total costs, that is net benefits.

• Objective-based instead of bias

                Every business has a similar issue related to bias. It can be possible business owners; directors or managers can emotionally have attached to any project that has not more appreciated profit. Cost benefits analysis will help to prioritize projects on the basis of benefits to the business. Hence, management can make the right decision at right time. That may help to eliminate the emotional elements and provides the best option for business profit.

• Budgeting and sales forecast

                Some of the information that can be possible to collect from a cost-benefit analysis. That information may be related to overall costs and overall benefits. In line with project budgeting requirements, detailed costs can be based of it, and even figures for the sales is easy to sales forecast from project benefits records.

• Setup the targets

                As you know the cost-benefit analysis help to estimate the project benefit from overall business processes. Even it is simple to find out the total cost of the project with the sum of individual costs from various expenses, but it is hard to predict benefits. The fact behind the benefits can be simply an estimation of the project frameworks. But overall views can be different such as product performance in the market at an actual time. However, there are options to set up the target with possible lower. Which may help to follow up accurate possible revenues from the market. Example:

i- A business wants to start manufacturing products. But it is having three different process projects ideas. Business wants to quickly decide which project is beneficial for the business. Hence, the business started a cost-benefit analysis for these three different ideas.

ii- On after calculations, the business got the total costs and benefits for all three ideas. As you can see below the table. Even, the cost-benefit ratio is also calculated on a basis of the formulation.

Basic Steps in CBA

STEP 1: Establish a Framework to Outline the Parameters of the Analysis.

• In establishing the framework of your cost benefit analysis, first outline the proposed program or policy change in detail.  Look carefully at how you position what exactly is being evaluated in relationship to the problem being solved.  For example, the analysis associated with the question, “should we add a new professor to our staff?” will be much more straightforward than a broader programmatic question, such as, “how should we resolve the gaps in our educational offering?”

STEP 2: Identify Costs and Benefits so They Can Be Categorized by Type and Intent.

• The primary categories that costs and benefits fall into are direct/indirect, tangible/intangible, and real

STEP 3: Calculate Costs and Benefits Across the Assumed Life of a Project or Initiative.

• With the framework and categories in place, you can start outlining overall costs and benefits. As mentioned earlier, it’s important to take both the short and long term into consideration, so ensure that you make your projections based on the life of the program or initiative and look at how both costs and benefits will evolve over time.
• TIP: People often make the mistake of monetizing incorrectly when projecting costs and benefits, and therefore end up with flawed results. When factoring in future costs and benefits, always be sure to adjust the figures and convert them into present value.

STEP 4: Compare  Cost and Benefits using Aggregate Information

• Here we’ll determine net present values by subtracting costs from benefits, and project the timeframe required for benefits to repay costs, also known as return on investment (ROI).

STEP 5: Analyze Results and make an Informed, Final Recommendation.

• Perform Sensitivity Analysis : Dr. Kaplan recommends performing a sensitivity analysis (also known as a “what-if”) to predict outcomes and check accuracy in the face of a collection of variables. “Information on costs, benefits, and risks is rarely known with certainty, especially when one looks to the future,” Dr. Kaplan says. “This makes it essential that sensitivity analysis is carried out, testing the robustness of the CBA result to changes in some of the key numbers.”
• Consider Discount Rates
  When evaluating your findings, it’s important to take discount rates into consideration when determining project feasibility.

Results

Positive – If both increasing and decreasing the rate yields a positive result, the policy or initiative is financially viable.

Negative – If both increasing and decreasing the rate yields a negative result, revisit your calculations based upon adjusting to a zero-balance point, and evaluate using the new findings.

At FMC, we have been engaged with several high-level private as well as related government projects within ASEAN countries. Our Advisory leader provides advisory, mentoring, and training for commercial organizations conform with prudent management. Reach us at faisal@faisalmalikco.com

Mohamad Faisal C.A. (M), CIPFA, CPSA, ASEAN CPA, CFP, DPIN, HRDF Cert Trainer has wide exposure in governance, business finance, corporate advisory, personal finance, and SME development. He is a business mentor, a certified accountant, a financial planner, and a certified business mentor. He is also a ‘Business Mentoring for Mentors’ from the Entrepreneurship Development Institute of India (EDII) and ‘Entrepreneurship in Emerging Economies’ from HarvardX Business School. He was also appointed as a council member to two national professional bodies, Chairman of SMP Malaysia, Member of the National Governing Committee to MPC Professional Nexus, an Industry Advisor to three local universities. He is also the founder of FaisalMALIK & co [CA].