Cost Benefit Analysis

A business conducts a cost benefit analysis when it needs to determine the cost and advantages of a certain business decision or project. This analysis helps in the decision-making process of determining if a certain investment is worth doing, or if a company would be better off trying a different solution. It is an important tool for making good management decisions.

To start a cost benefit analysis, you have to total up all of the costs of the decision you are focusing on as well as its alternatives. Not only are these the total of the direct costs of the project, but also the indirect costs and other factors of the decision that will affect the company in some way. If you need more workers to do a particular project, then you have to calculate in the added expense of an expanded workforce. And that expense may mean more training, HR effort, etc. to get the number of employees to where it needs to be for the project. As a different option, you can compute the cost if that extra work was outsourced.

Once you have determined the costs, then you have to estimate what the benefit to the company is by undertaking the decision. And these benefits are not limited to potential profit, but any other benefit that results such as added safety, social value, competitive advantage, attractiveness to investors, etc.

The goal is to take the information that you have compiled on the costs and the benefits and make the best decision that will have the smallest cost while yielding the biggest benefit. Once again, it is important to not limit the analysis to just the monetary benefits of a decision, but the overall benefits to the firm. While Plan A may realize a bigger profit, Plan B may bring in a slightly smaller figure, but the resulting positive PR that it generates may provide a much bigger benefit in the long-run.

Remember, the short-term and long-term benefits need to be weighed against each other in deciding what is best for the company. A sudden increase in profit at the expense of keeping consistent customers could prove disastrous down the road.

We know the value of money is not fixed. The cost of money changes depending on interest rates, economic conditions, and inflation. These need to be factored in as best as possible when conducting the analysis.

Once you have calculated all of these factors, then each decision needs to be indexed in such a way that you are comparing apples to apples. For this you can calculate the net present value or a payback period. This is done by taking the present value of future cash flow and factoring in the adjustments due to the time value of money. The net present value is cash flow minus the costs. This total is divided by a discount rate. A payback period is the amount of time it takes for the benefits of a decision to surpass the costs. By using either of these methods, it will clearly illustrate how multiple options stack up against each other.

Using a credit card for financing business purposes has often hurt small businesses. The risk associated with credit cards quickly trumps its ease of use. For many business owners, they are not aware of all the potential pitfalls. But not using a credit card wisely, a business may subject itself to a bad credit rating, smaller credit limits, hidden fees, and higher interest rates. Please be aware of the following information when deciding whether to use a credit card in your business.

One of the first decisions to make is whether to pay for business purchases with a business card or a personal card. This may seem like a no-brainer, but credit card companies are not allowed to raise the interest rates on a personal card within 60 days of delinquency. Business cards do not have the same rules. Since you are personally accountable for whichever card you utilize, you may be better off using the personal card.

Look at the items you have purchased for a business over a three month period. You may be very surprised at the amount of unnecessary items and purchases you made. The ease with which a credit card enables a business owner to buy things can lead to spontaneous purchases that weren’t really needed. This may be a good time to update the company’s budget to help stay focused on making only critical purchases with your card.

Before issuing a business credit card, the credit card company examines the personal credit history of the individual making the application. When these finance companies look at a small business, all they see is the owner. Take advantage of obtaining your annual free credit report to make sure the information about you is accurate. If you find a discrepancy, go through the protocol necessary to get it cleaned up.

It is important to keep track of how much credit you have used among all of your credit cards. A general guide is not to utilize more than 30% of your available credit at any given time. If this is happening on one of your cards then you may want to apply for an alternative card. Be sure that no single card is inactive for too long or the credit card company may cancel that card. This will lead to a higher ratio of credit utilization which in turn may bring down your credit rating.

A credit card should be used like this only in an emergency. The interest rates on cash advances are ridiculously high and the interest begins to accumulate as soon as you receive the money. Thoroughly explore other options before resorting to using your credit card for a cash advance.