As with any process, it’s important to work through all the steps thoroughly and not give in to the temptation to cut corners or base assumptions on opinion or “best guesses.” According to a paper from Dr. Josiah Kaplan, former Research Associate at the University of Oxford, it’s important to ensure that your analysis is as comprehensive as possible:
“The best cost-benefit analyses take a broad view of costs and benefits, including indirect and longer-term effects, reflecting the interests of all stakeholders who will be affected by the program.”
How to Establish a Framework
In establishing the framework of your cost benefit analysis, first outline the proposed program or policy change in detail. For example, the analysis associated with the question, “should we add a new professor to our staff?” will be much more straightforward than a broader programmatic question, such as, “how should we resolve the gaps in our educational offering?”
Once your program or policy change is clearly outlined, you’ll need to build out a situational overview to examine the existing state of affairs including background, current performance, any opportunities it has brought to the table, and its projected performance in the future. Also make sure to factor in an objective look at any risks involved in maintaining the status quo moving forward.
Now decide on how you will approach cost benefits. Which cost benefits should be included in your analysis? Include the basics, but also do a bit of thinking outside the box to come up with any unforeseen costs that could impact the initiative in both the short and long term.
In some cases geography could play a role in determining feasibility of a project or initiative. If geographically dispersed stakeholders or groups will be affected by the decision being analyzed, make sure to build that into the framework upfront, to avoid surprises down the road. Conversely, if the scope of the project or initiative eters, that should be taken into consideration as well.
Identify and Categorize Costs and Benefits
Now that your framework is in place, it’s time to sort your costs and benefits into buckets by type. The primary categories that costs and benefits fall into are direct/indirect, tangible/intangible, and real:
- Direct costs are often associated with production of a cost object (product, service, customer, project, or activity)
- Indirect costs are usually fixed in nature, and may come from overhead of a department or cost center
- Tangible costs are easy to measure and quantify, and are usually related to an identifiable source or asset, like payroll, rent, and purchasing tools
- Intangible costs are difficult to identify and measure, like shifts in customer satisfaction, and productivity levels
- Real costs are expenses associated with producing an offering, such as labor costs and raw materials
Now that you’ve developed the categories into which you’ll sort your costs and benefits, it’s time to start crunching numbers.
How to Calculate Costs and Benefits
With the framework and categories in place, you can start outlining overall costs and benefits. As mentioned earlier, it’s important to take both the short and long term into consideration, so ensure that you make your projections based on the life of the program or initiative, and look at how both costs and benefits will evolve over time.
TIP: People often make the mistake https://georgiapaydayloans.org/cities/athens/ of monetizing incorrectly when projecting costs and benefits, and therefore end up with flawed results. When factoring in future costs and benefits, always be sure to adjust the figures and convert them into present value.
