[vc_row][vc_column][vc_column_text]By: Leanne Armstrong
Every business needs an effective way to navigate impactful decisions. By learning how cost benefit analysis diagrams work to weigh risks against rewards, you and your team can make better sense of financially complex situations and feel more confident in the actions you take.
In this high-level overview, we use plain language and simple examples to break down the cost benefit analysis definition, and show you how valuable this process can be.[/vc_column_text][vc_column_text]
What is a cost benefit analysis?
A cost benefit analysis is a tool for getting the most from any choice or investment you make. It equips you with an orderly process for:
- Analyzing different situations, systems, or project plans
- Gauging the strengths and weaknesses of various options, so you can determine the most cost-effective approach
- Reaching go/no-go conclusions for specific decisions
By laying out and adding up the resources or risks (costs) attached to a particular course of action – and subtracting those from the rewards or advantages (benefits) it’s likely to yield – a cost benefit analysis helps to streamline the decision-making process.
How to use a cost benefit analysis
Putting together a sample cost benefit analysis map can help you decide whether to move forward with an idea, or whether you’d do well to rethink it.
When benefits outweigh costs, for example, it’s incentive to go ahead with your plan. If costs outweigh benefits, meanwhile, you may need to make adjustments or put the brakes on your project outright.
Because they provide the means to objectively examine options and consequences over a period of time, many companies use cost-benefit evaluations to make unbiased, evidence-driven decisions around:
- Large capital purchases or investments
- Allocation of resources during growth or expansion
- Development and evaluation of strategic planning
But you can also put a cost benefit analysis template to work in all kinds of everyday matters – from determining the right time to hire new staff, to deciding whether or not to upgrade your software.
Performing a detailed cost evaluation often means tapping into financial data and other workplace knowledge – like when you need to assess the practicality of a new project by determining:
- Material and labor costs
- Revenue and time savings
- Financial feasibility and ROI
A cost benefit analysis can even help you estimate and assign hard values to intangible items like goodwill, or the emotional cost of relocating employees, for example.
Creating a cost benefit analysis template also lets you take opportunity costs into account.
Every important decision involves weighing the pros and cons of different outcomes. And since any choice you make will likely mean forfeiting certain advantages, assigning a value to those lost benefits can make it easier to calculate and arrive at a decision.[/vc_column_text][vc_column_text]
How to create a cost benefit analysis diagram
With no true recognized standard, you can use the maps and diagrams in a program like MindManager to lay out and work through a variety of cost benefit analysis examples. You can even take advantage of MindManager’s integrated calculation functions to sort through budgets and planning figures.
Here’s how to create a cost benefit analysis diagram in 4 easy steps.
Make a detailed list of all the tangible and intangible costs and benefits attached to your decision, project, or process.
Label a bubble or node at the center or left side of your diagram with the name of the action you’re planning to take.
Use branch lines to link your main node to secondary nodes labeled Costs and Benefits. Link those nodes to the various resources and rewards from your list.
Attach budgets, forecasts, and other calculations involving both costs and benefits, extending them across the timeframe during which you expect your action or decision to play out.
And that’s it!
Now you can use your finished diagram to analyze and compare outcomes, and determine whether predicted benefits outweigh costs, or vice versa. Just remember that, for the most prudent results, it’s best to overestimate costs and underestimate benefits whenever those amounts are in question.[/vc_column_text][vc_column_text]
Example of a cost benefit analysis diagram
Rather than struggling to overcome personal bias, here’s a simple cost benefit analysis example that shows how mapping out your options with factual data and reasonable assumptions keeps every decision more grounded.
Let’s say you run a call center that’s grown to the point where you’re hiring about 4 new team members each year. You’d like to outsource your employee recruitment, and have identified 2 promising firms: one recommended by a fellow entrepreneur, the other run by a former teammate.
Because the companies offer similar services, your team is having trouble choosing between them. So you decide to use a cost benefit analysis diagram to make the decision easier.
You start by listing out the fees charged by each firm, along with their proven strengths and weaknesses, and plug that data into your diagram.
Next, you calculate the average finder’s fee for each company, and assign a dollar value to intangible items.
Your team agrees that, while working with a dedicated account rep may eventually translate into a time savings dollar amount, Company B’s unproven reputation makes this value non-existent right now.
Finally, you extend your cost and benefit values over a sample 5-year period, and determine that:
- Working with Company B has the potential to save your business $500 upfront plus $3000/hire x 4 hires/year = $12,000 x 5 years = $60,000
- Working with Company A will cost more overall, but if even 2 hires per year don’t stick as a result of working with Company B (a reasonable assumption given their lack of experience), you’ll save employee replacement costs of $6000/hire x 2 hires/year = $12,000 x 5 years = $60,000
With roughly equal financial benefits, your team opts to put any personal feelings aside and work with Company A to increase the likelihood they’ll experience fewer recruitment headaches. [/vc_column_text][vc_column_text]
Cost benefit analysis use cases
Although it may provide only a reasonable estimate in many cases, a carefully constructed cost evaluation is still a powerful decision-making tool. As we close out our exploration of the cost benefit analysis definition, here are a few use cases that show how different companies might put this versatile decision-making diagram to work.
Company A wants to explore an investment opportunity.
Having stumbled across an unexpected opportunity to take over a competitor’s business, the company needs to decide if an acquisition would be wise in terms of timing and budget. They sit down with their department heads and accounting team to flesh out a cost benefit analysis, then decide to bring in a financial analyst as well.
After examining the pros, cons, market trends, and revenue forecasts involved, the company ultimately decides that now is not the right time to invest in new business.
Company B wants to assess a recent change initiative.
Following a recent overhaul of their marketing process, the company wants to compare costs, sales, and product awareness from before and after the change took effect. They gather the relevant financial statements, customer surveys, and market research and plug their data into a cost benefit analysis diagram.
The company happily concludes that their marketing initiative has profitably increased both sales and public awareness of their product.
Company C wants to greenlight a new project.
The company’s accounting team wants to implement new software to automate their workflow. They’ve already conducted a sample cost benefit analysis to determine the financial viability of several options. Now they meet with management to lay out and discuss these outcomes in detail.
The company quickly settles on the most cost-effective option for speeding up their accounting workflow and reducing the occurrence of manual errors.
Whether you need to make a well-founded business decision or visualize the risks and rewards of your next strategy, MindManager’s mapping diagrams can give you a flexible overview of any situation, while making it easy to drill down into the details.[/vc_column_text][vc_column_text]
Downloadable cost-benefit analysis templates from MindManager
Click the image below to access the cost-benefit analysis template created using MindManager. Click “Menu” in the bottom left corner of your browser window, and then click “Download” to get a copy of the template. Open the template in MindManager to start working with the template.
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