How To Conduct A Cost-Benefit Analysis – Forbes Advisor – Technologist

When conducting a cost-benefit analysis, it is important to adhere to certain best practices for the most accurate results. Here are six key best practices:

Clearly Define the Objectives

In order to test something, you must know what you are testing. Having a firm grasp on your project’s objectives can streamline your cost-benefit analysis. It keeps the focus on specific aspects that require evaluation and prevents the process from veering off-topic. This clarity also helps you avoid the trap of collecting irrelevant data.

Gather Accurate Data

Reliable data is the foundation of any CBA. It seems obvious to say, but incorrect data can skew the analysis results. Some ways to ensure your data is reliable are to use credible sources, cross-verify data, consult experts and update data regularly.

Use Appropriate Discount Rates

To make a fair comparison in your analysis, you need to consider the present value of future costs and benefits. This involves using a discount rate that is based on the idea that today’s money is more valuable than the same amount in the future. This lets you compare costs and benefits over different timeframes. The discount rate takes into account the opportunity cost of capital (money you could make if you used your funds elsewhere) or the expected rate of return.

Evaluate Risks

Account for possible shifts in essential elements that might influence the outcome. This could involve techniques such as scenario analysis or sensitivity analysis. Scenario analysis allows us to gauge the impact of different future conditions, while sensitivity analysis scrutinizes how changes to certain variables might sway overall results.

Ensure Transparency

Be transparent about the methodology, assumptions and limitations of your analysis. This enhances the credibility and reproducibility of your findings.

Revise and Update

Be prepared to revise and update your analysis if there are significant changes in the project scope, economic conditions or available data. This ongoing revision ensures that the analysis remains aligned with current realities and can support dynamic decision making in a changing business landscape. Regular updates can also help in identifying new opportunities or risks that were not apparent in the initial analysis.