Whether you are considering a new software package, implementing a policy or just thinking about a renovation to your home – making a good decision often starts with a cost-benefit analysis. But what exactly does that entail? And how do you conduct it intelligently?
What is a cost-benefit analysis?
A cost-benefit analysis (CBA) is a method by which you systematically identify the advantages (benefits) and disadvantages (costs) of a project or decision. The aim is to determine whether the initiative pays off: do the expected returns outweigh the investment?
Here, you look not only at money, but also at time, effort, risks and non-financial effects such as customer satisfaction, sustainability or social impact.
Why is it useful?
A CBA helps you to:
- Makeinformed decisions.
- Identifyrisks and unexpected costs in advance.
- Create support among colleagues, investors or stakeholders.
- Prioritise multiple options or projects.
How do you conduct a cost-benefit analysis?
A simple CBA often consists of five steps:
1. Clearly define the purpose or project
What exactly do you want to achieve? For example, “Replacing our current help desk software to handle customer queries faster.”
2. Take stock of all costs
Consider:
- One-off costs (purchase, installation)
- Recurring costs (subscriptions, maintenance)
- Indirect costs (training, implementation time)
3. Determine the benefits
Benefits are often more difficult to quantify, but consider:
- Time savings for employees
- More satisfied customers (and thus more repeat purchases)
- Lower error rates or fewer complaints
4. List costs and benefits
For example, create a table with an overview by month or year. Try to link as many amounts to benefits as possible, but also be transparent about what is not measurable.
5. Analyse and draw conclusions
What is the payback period? What is the difference between costs and benefits in the long run? Are there scenarios where it doesn’t work out anyway?
Example: A New CRM Tool
| Cost | Amount per year |
|---|---|
| Licences | €5.000 |
| Training for employees | €2.000 |
| Implementation costs | €3.000 |
| Total cost | €10.000 |
| Income | Estimated value per year |
|---|---|
| Time-saving customer service | €4.000 |
| Fewer errors = less recovery | €2.000 |
| Higher customer satisfaction | €5,000 (loyalty) |
| Total income | €11.000 |
Conclusion: The benefits are higher than the costs; thus, the project seems profitable.
What should you pay attention to?
- Be realistic. Benefits are often based on assumptions. Name uncertainties explicitly.
- Think long term. An investment may seem loss-making in the first year, but only really pay off after two years.
- Don’t forget non-financial effects. Some benefits are difficult to monetise, but essential.
Investment Decisions
Understanding the relationship between costs and benefits is crucial when making investment decisions. Investment cash flows provide insight into when and how much money an investment generates, while cost-benefit analyses help determine whether the investment is worthwhile. A clear overview of cash flows enables strategic planning and risk mitigation. Learn more in our blog.
A cost-benefit analysis does not guarantee success, but it is a powerful tool for making decisions with greater certainty. Whether you are an entrepreneur, policy-maker or project manager – understanding costs and benefits gives guidance.
