Cost-benefit analysis

Cost-benefit analysis: overview and application

The cost-benefit analysis is a tool for the economic evaluation of projects and investments. The focus is on comparing the costs incurred and the potential benefits of a project. In contrast to purely financial analyses, benefit factors that are difficult to quantify, such as process improvements or increased employee satisfaction, are also taken into account. This method is particularly helpful in areas where the monetary benefits are difficult or even intangible.

What is a cost-benefit analysis?

A cost-benefit analysis is a systematic investigation that evaluates both financial and non-financial aspects of a project. In doing so, costs such as acquisition, training or implementation costs are weighed against benefits such as time savings, process optimization or quality improvements. The analysis can be carried out both in monetary units and through qualitative estimates.

Special features of the cost-benefit analysis

The main difference from traditional profitability analyses is that the benefits are often not based on existing market prices. In many cases, the benefits must be estimated or qualitatively assessed. In this way, aspects such as improved work processes or increased employee satisfaction can be included in the analysis, even if they cannot be directly measured financially.

Areas of application of cost-benefit analysis

Cost-benefit analysis is often used for projects whose benefits are difficult to quantify. It is particularly useful when alternative investments are to be compared and there are no clear monetary indicators. Examples of typical applications include:

• IT systems: Acquisition of new or replacement of existing IT infrastructures.
• Organizational restructuring: adjustments in the company organization.
• Continuing education measures: Training to improve employee qualifications.
• Business management tools: Introduction of new tools such as target cost accounting or budgeting.

Key benefit factors

Not all the benefits of a project can be directly expressed in money. Therefore, the cost-benefit analysis often takes qualitative criteria into account. Here are some typical non-monetary benefit factors:

• Reduction of processing and processing times
• Improving work processes
• Increased employee qualification
• Reducing the error rate and complaints
• Improving service quality and customer loyalty
• Increasing employee motivation

Carrying out a cost-benefit analysis - practical example

A medium-sized company is planning to introduce a new customer relationship management system (CRM) to improve sales and customer communication. The goal is to increase sales in the long term through more efficient processes and better use of data. However, the direct financial benefits of the investment are difficult to grasp, so a cost-benefit analysis is carried out.

Costs (€) Category 25,000 software licenses 8,000 Staff training 5,000 Data migration 12,000 Implementation costs (IT effort) 6,000 loss of productivity during implementation 56,000 total costs

Benefit:

The benefits are mainly derived from process improvements, efficient customer service and increased sales figures. Since these benefits are difficult to quantify in monetary terms, an estimate is made:

Benefits (€) Category 45,000 Faster processing times (1,500 hours at €30) 15,000 Improved customer satisfaction (lower churn) 20,000 Optimized sales processes (estimated increase in sales) 8,000 Reduction of errors and duplication of work 88,000 total benefits in the first year

Result of the cost-benefit analysis:

In the first year, the estimated costs exceed the benefits by 56,000€, but from the second year, the company generates a net benefit of 32,000€ per year (88,000€ benefits — 56,000€ costs). This means that the investment pays off after just under two years.

Tips for objectifying analysis

• Involving different departments: This makes the analysis more diverse and balanced.
• Monetization of non-financial factors: Where possible, qualitative benefits (e.g. time savings) should be converted into money.
• Long-term view: Many of the benefits of a project only develop over several years.

conclusion

The cost-benefit analysis provides a comprehensive perspective on investments and projects by looking not only at figures but also at qualitative benefits. It enables companies to make well-founded decisions even when the financial benefits are difficult to quantify.