Making strategic decisions is a valuable skill. Analysing these decisions, especially when weighting alternatives, needs a structured process. Enter Cost-benefit analysis (CBA).
CBA is a standard method of estimating strengths and weaknesses of potential decisions. When quantified, it creates an easy understanding of outcomes. That is very important when comparing strategic decisions and trying to mitigate business risk.
Cost-benefit analysis is not ground breaking nor complicated. It formalises process many of you are already doing. You put benefits on one side of a ledger, associated costs on the other side and assign monetary value.
Estimating monetary value is often a bit tricky, because it involves a lot of unknowns. That's where practice from previous planning and forecasting will come handy. After you assign values to costs and future benefits, you simply compare those two numbers and consider the venture profitable or not.
Main reason to perform cost-benefit analysis is to compare alternatives. If you are familiar with opportunity costs, you know, that every business action has an alternative, even if it is mere inaction.
When considering the options, try to be objective. Especially in assigning value and value of your own time in particular. Entrepreneurs often undervalue their time, because it doesn't have any particular costs connected to it. But time is valuable.
CBA is a great standard tool to consider, loved by small scale enterprises and public sector along. The only downside: it doesn't account for time. Costs and revenues of each following year are treated as equal even though revenue at the beginning would certainly be more valuable.
Are you convinced to try in dealing with your next business conundrum?