Definition: A process by which you weigh expected costs against expected
benefits to determine the best (or most profitable) course of
action
When it comes to goal setting or deciding on the best plan of
attack, working up a cost-benefits analysis will help you decide
just which route would be best for you. And a cost-benefit analysis
doesn't have to be complicated. You simply draw a line down the
middle of a piece of paper to create two columns. On the left, list
the benefits of achieving a given goal. On the right, list what it
will cost you to get there. Once you've done that, you can simply
add up the benefits and costs columns and see which has more, or
assign weighted scores to each entry and total them at the bottom.
Of course, you may not want to let this quick and easy analysis
make the final decision for you. And it may sometimes be the
nearest thing to a tossup. But even a simple cost-benefit analysis
can give you an idea of whether a given goal is worth investigating
further.
An example is a sales director who needs to decide whether to
implement a new computer-based contact management and sales
processing system. The sales department currently has only a few
computers, and its salespeople aren't computer savvy. Any system
upgrade would require extensive employee training. The company is
likely to experience a drop in sales during the transition
period.
While total expenses, including equipment, installation and
training costs, plus lost productivity, are estimated to be
$55,800, the company's analysis reveals the new computer system
would increase sales capacity, boost efficiency and enhance
customer service and retention--financial benefits the company pegs
at $90,000 annually. Based on the cost-benefit estimates, the
company would see a return on its investment in eight months.
(Payback time: $55,800 ? $90,000 = 0.62 of a year.)