subject: Spend Management Consulting Can Be Rewarding [print this page] Are you thinking about completing a cost benefit analysis? This process is very helpful when you're trying to determine whether a project is a sound investment or when you're trying to decide which of two projects will produce better results. With this type of analysis you'll compare the price of each option overall with the expected benefits. Your goal would be to see which project has benefits which outweigh the costs and how much of a difference exists among the two.
This type of analysis is different from one that looks at how cost-effective a project is. Here the costs and benefits are expressed in dollar amounts. This enables these amounts to be adjusted over time in terms of time value for money. If this method is used, all benefits and project costs can be looked over with regards to the present value. Be sure you don't confuse this accounting method with economic impact analysis, cost-utility analysis or Social Return on Investment analysis.
Business and governments utilize cost benefit analysis to determine if a project should be completed or perhaps a policy implemented. If this strategy is used, many factors are considered. Foregone alternatives are just one component that is considered to determine if a policy will be effective. Here the status quo will also be examined to see if keeping things the way they are would be better.
If you use this method of analysis, you can better select which projects will produce the best results at the least cost. Be aware that, when used for social welfare projects, there is no foregone conclusion. A number of other factors play a role on this like human behavior so the analysis is more of a best guess. You can put a program into place, but you can't force people to utilize it if they don't want to.
In order to complete a cost benefit analysis, there are certain steps that need to be taken. First a summary of projects to be compared must be completed after which key players must be determined. Figure out how you will measure costs and benefits and collect this data. You will then need to look at the complete project and predict the outcome of the costs and benefits.
Costs and benefits should be placed into dollar amounts when doing this kind of analysis. If a discount rate exists, it must be applied before you calculate the net present value of the various options. Finally a sensitivity analysis need to be done before recommendations can be created as to which project or projects should be chosen.
When completing a cost benefit analysis, you need to look at any risks that may develop as a result of selecting a particular project. Probability theory can be quite helpful here. Factor this in to the discount rate or use it separately. The choice is up to you, but make certain your focus is on risk aversion.
A sensitivity analysis must also be performed. This shows how, if parameters are changed, the results may also change. There are lots of ways to complete this task and you will need to pick the one that's best for the needs you have.
