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What Is 'Cost-Benefit Analysis'?

Cost-Benefit Analysis is the process of examining potential changes to your business to see if the benefits outweigh the costs. When conducting a Cost-Benefit Analysis, it’s important to include costs and benefits that aren’t purely financial.

Before making a decision, evaluate the total costs and benefits. If the data you’re examining doesn’t lead to make changes that improve your business, you’re wasting your time.

Josh Kaufman Explains 'Cost-Benefit Analysis'

The purpose of financial analysis isn’t to produce impressive-looking spreadsheets: it’s to make better decisions. If the data you’re examining doesn’t lead to make changes that improve your business, you’re wasting your time. The core of Finance is examining a potential action, consulting the data you have at your disposal, and deciding what (if anything) to do.

Cost-Benefit Analysis is the process of examining potential changes to your business to see if the benefits outweigh the costs. Instead of acting on a change the moment you think of it, you stake a step back to evaluate the true cost of the action, and whether or not you believe it’s the best thing you can do with your limited time, energy, and resources.

When conducting a Cost-Benefit Analysis, it’s important to include costs and benefits that aren’t purely financial. Non-economic costs, like enjoyment, can play a large role in whether or not a project is worth pursuing. Google’s famous cafeteria benefits are a good example: the company provides free, high-quality food to employees around the clock. This policy looks like a huge cost until you consider the benefit: by providing breakfast, lunch, dinner, and snacks, the company is encouraging employees to be at work as much as possible. The cost is offset by the increase in productivity and team cohesion, which is very significant.

Removing chronic frustrations and small inefficiencies can be just as beneficial. I recently spent a few hundred dollars to upgrade my computer’s hard disk to a solid state drive that is six times faster. My applications and programs now launch instantly, instead of requiring a 5-10 second wait. That doesn’t sound like much, but small improvements Accumulate over time. I spend most of my work time on the computer, and it’s a huge difference. I’m happier, and I’m getting more work done: money well spent.

Before making a decision, evaluate the total costs and benefits. A little evaluation will ensure you spend your money in the most effective ways.

Questions About 'Cost-Benefit Analysis'

• Do you consistently do Cost-Benefit Analysis before making financial decisions?
• Do you consider non-financial as well as financial costs and benefits?

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"I must study the plain physical facts of the case, ascertain what is possible, and learn what appears to be wise and right. The subject is difficult, and good men do not agree."

Abraham Lincoln

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