Cost - Benefit Analysis

A cost�benefit analysis provides an economic framework to evaluate the viability of a proposed project.  Cost�benefit analysis is the systematic gathering of technical and financial data about a given business situation or function. Information gathered and analysed through this method assists decision-making about viability and resource allocation.  A cost�benefit analysis specifies financial inputs and expected quantitative and qualitative returns from a given project. It compares �with� and �without� situations. The results of this analysis can be used to evaluate alternative options. It can strongly support a bid for management endorsement and resource allocation.  To undertake a cost�benefit analysis the scope, purpose and objectives of the proposed project must be explicit.

Costs

Costs are anticipated expenditure. They can be tangible, and therefore quantifiable, or intangible and less easy to assign a dollar figure. Costing a project is difficult and advice from financial staff will be helpful.

Attempt to provide a dollar figure for each cost. When quantifying costs that will be encountered in the future, consider whether inflation should be factored in.  Gathering as much relevant data as possible will ensure accurate results.  Even so, some costs may need to be estimated, as clear-cut figures may not be available. The use of �best guess� estimates is valid for intangible costs, as they will have to be, by definition, estimations. Where this is necessary, ensure that the assumptions used to assign a dollar figure are stated.

Tangible or quantifiable costs

Information on the level of staff expertise and training required to undertake the proposed project and its expected time frame are tangible costs. Cost types include:

Intangible or non-quantifiable costs

Costs associated with intangibles, although not easy to quantify, need to be recognised as they can impact on the overall costs of the project under consideration. The cost�benefit analysis should acknowledge non-quantifiable costs, even if they are not factored into the calculations in the analysis.  Depending on the project, some intangible costs to consider may include:

What are benefits?

Benefits are the returns expected from a project. Most benefits are articulated in terms of improvements or cost savings. Like costs, benefits can be quantifiable (tangible) and non-quantifiable (intangible).  You should attempt to provide a dollar figure for each benefit. Again, when quantifying benefits that will be achieved in the future, consider whether inflation should be included. Again, seek advice from financial staff.  Bear in mind that secondary benefits may also be derived from a project � that is, benefits that will be achieved because other benefits were delivered. They must be practical and realistic. The best way to achieve this is to investigate benefits over a reasonable time frame.

Tangible or quantifiable benefits

Tangible benefits are quantifiable service or financial gains to the organisation. Tangible benefits include:

Intangible or non-quantifiable benefits

Intangible benefits are non-quantifiable improvements in the �welfare� of the organisation. These are still valuable tools in convincing management to undertake a proposed project. Intangible benefits include:

Organisations have little choice but to comply with legislative requirements.  Therefore, quantifying these benefits may not be very useful. It is more important to emphasise the benefit of achieving compliance.

Another way at looking at benefits is to divide them into:

Performance driven benefits include aspects such as organisational outcomes, customer satisfaction, and return on investment. Value driven benefits include increased access, flexibility or ease of use. Finally, societal benefits may include environmental aspects such as reduced traffic and pollution, unemployment, and the potential for new markets. These benefits can be assessed both quantitatively and qualitatively.  Quantitative data can be obtained from market/customer surveys. Qualitative data can be obtained through interviews or via written feedback via a number of channels.

Determining cost�benefit analysis results

Compare the overall costs and the overall benefits that the proposed project would deliver to the organisation. Are the benefits derived more important than the costs to the organisation? Figures in dollars will strengthen an argument as to why the project is viable and valuable. Management is more likely to endorse the allocation of financial resources if the predicted return on investment (benefits minus costs) is persuasive.  Incorporate the calculations and findings of the cost�benefit analysis into a business case to support the proposed project. The report should highlight costs and benefits in monetary figures, but also emphasise the intangible facets associated with undertaking the proposed project.

Simplistic Financial Cost-Benefit Framework

 

Thousands of dollars

Benefits

Yr1

Yr2

Yr3

Yr4

Total

Additional Profit from initiative

         

Costs

         

Capital/recurrent costs

         

Production & delivery costs

         
Fixed costs          
Variable costs          

Benefits minus costs

         
           

Risk expressed quantitatively (%)

60%

30%

20%

20%

Ave: 32.5%

           

Expected benefit

         

Cost-Benefit Analysis: Step-by-Step Example

The following example works us through a cost benefit analysis based on an employee turnover decision making process.

Calculating Employee Turnover Costs
Step 1: Calculate the Current Rate of Turnover
a. # of employees leaving per year ________
b. average number of employees ________
c. divide line a by line b ________
d. % of turnover = line c x 100  ________
Step 2:  Calculate the Annual Cost of Employee Turnover to the Company
Employment Advertising � all recruitment advertising and related costs ________
Employment Agency and Search Fees � fees to employment agencies, search firms, and recruitment consultants ________
Internal Referrals � costs for bonuses, fees, gifts, etc, awarded to employees participating in a company-sponsored referral program  ________
Applicant Expenses � travel and subsistence costs ________
Relocation Expenses � moving expenses and all other costs associated with relocation ________
Employment Staff Compensation � all salaries, benefits, 
and bonuses of the employment staff involved in recruiting, 
interviewing, hiring, and training new employees
________
Other Employment Expenses � all other related expenses, 
such as the cost of facilities, telephone, consultants, etc
________
Orientation and Training � include management time, trainer fees, materials, and other costs for training new employees ________
Estimated Total Costs ________
Number of New Employees ________
Average turnover cost per new employee: divide total costs 
by the number of new employees.
________
Step 3: Calculate Estimated Reduction in Turnover
Use data collected from needs assessment surveys, focus groups, exit interviews, etc, to determine how many of your separating employees typically leave because of dependent care or other work/life issues. ________
Deduce how many of these probably would not have left had your proposed program or policies been in place. (Remember that employees often are reluctant to name child care as a reason for leaving. Therefore, your needs assessment may understate the problem.) ________
Estimated reduction in turnover: subtract line 2 from line 1. ________
Step 4: Calculate Expected Savings in Turnover Costs
Multiply the expected reduction in turnover (step 3) by the average turnover costs per new employee (step 2) to determine the expected savings in turnover costs.
________________   x   _________________    =
(reduction in turnover)             (average turnover cost)
________
Calculating the Cost of Absenteeism
Step 1: Calculate the Annual Cost of Absenteeism Per Year
___________________   x   __________________    =
(# work days lost per year)                (cost per work day)
________
Step 2: Calculate the Expected Reduction in Absenteeism
Estimate the percentage of current absences that might be due 
to child care problems.
________
Step 3: Calculate Expected Savings in Absenteeism Costs
Multiply the annual cost of absenteeism (Step 1) times the 
estimated reduction that might result from proposed work/life 
policies (Step 2) to determine expected savings.
Total savings: _____________    x   ______________    =
                       (annual cost)                    (expected reduction)
________

Source: http://www.hawaiicommunityfoundation.org/bizkids/pdf/Cost_Benefit_Analysis.pdf

Reprinted with permission from "Cost Benefit Analysis," Oregon Employer Tool Kit for Implementing Work/Life Programs, Oregon Child Care Division, 1997. This document is for informational purposes only.

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