Good financial decisions are the life-blood of a vibrant business. The 9 ways listed below will help you to improve the way you make financial decisions, guaranteed. Let's list them out shall we? What Is Cost Benefit Analysis It is pointless doing this analysis if you do not investigate ALL the available options. More options will mean a better outcome. What is the use of just hoping that your decision is best if you haven't spent the time to ensure you have canvassed ALL the feasible ways of solving your problem? Maybe the 'Do Nothing' option is the best way. Unless you test it out you won't know. There are resources to assist in thinking more creatively thereby allowing you to generate more ideas and options. Search the Internet under 'creative thinking', you will find many to choose from. Thinking through all the options lays a good foundation for the analysis that follows. Placing a $ figure against all the costs and benefits provides a standardized way of looking at the answer. The answer is termed the Benefit Cost Ratio. There are certain costs and benefits that must be included and there are some that must be excluded. Follow the proven guidelines and you can't go wrong. Some costs and benefits that must be included are:
Some costs and benefits that must be excluded are:
This method provides a clear analysis of the option so that the best option stands out. When making decisions regarding asset purchases it is critical that ALL the costs relating to the asset are included in the proposal. How can you make a valid comparisons between competing proposals unless all the costs are thought through and included? Some costs that are commonly missed are:
5. Clearly shows assumptions Cost Benefit Analysis offers the ability to clearly outline all assumptions and how they were arrived at. This is especially important when discussing the merits, or otherwise, of each competing proposal. It also provides a firm foundation for discussing the lessons learnt once the successful proposal has been implemented. 6. Clearly shows which projects are VIABLE and which are UNVIABLE The Cost Benefit Analysis model clearly shows which option is worthwhile adopting and which is not. If the Benefit Cost Ratio is 1 or greater, that project is viable, less than 1 means it is unviable (all other things being equal). Once this has been calculated for all competing feasible options you can then choose the option with the highest Benefit Cost Ratio from those that are classed as viable.
No doubt, when you build your assumptions some elements are more sensitive to change and produce a greater impact on the overall result than others. The process to test these elements is called Sensitivity Analysis. Since the assumptions are clearly laid out, it is usually quite easy to create a Sensitivity Table. This can add a lot of weight to your proposal. 8. Makes post completion review a breeze Once the correct option has been chosen, funded and implemented and has been operating for about a year it is a good time to go back and assess the quality of your original assumptions. You can check on the cost and benefits elements-compare assumed prices with actual. and see how close they were. What lessons can be learned here? Mostly costs are underestimated and benefits overestimated. Were there any mistakes made? This analysis can help you ensure that any mistakes made are not transferred to the next project. If you need to 'sell' your project to various stakeholders, be they employees, shareholders, the press, unions, politicians or the Board of Directors, the fact that you have used the proven, tested process will make the selling easier. What Is Cost Benefit Analysis |
How To Grow Wealth | ||||||||||||||||||||||||||||||||||||||||||
|
|