Cost/Benefit Analysis

Cost/Benefit Analysis

            Business management is an exercise that takes into account many factors to ensure that a given enterprise runs efficiently and can meet its set out objectives and goals. One critical aspect of business management lies in the decision-making process where policies, as well as other implementations that affect the business in various ways, get implemented into the operational plan. As a result, it is necessary to ensure that there is the undertaking of a proper analysis of business concerning its costs and benefits to come up with the most appropriate approaches that will drive the institution at hand towards achieving the desired goals whether short term or long term (Mishan, & Quah1976). It is, therefore, every institution’s basic need, whether profit or non-profit to be able to make informed decisions that drive it towards the achievement of the set-out objectives. One way in which this can get accomplished is through the use of accounting concepts to make informed decisions.

Cost/Benefit Analysis for a Business Idea

Also referred to as a CBA analysis, the cost and business analysis are a business tool that is used to analyze the decision made by a company.  The approach takes into account the total benefits associated with taking a particular path, i.e. decision process and subtracts this from the cost incurred during the decision process implementation (Fairfax, 2005). Before undertaking any new business venture, managers with a proper understanding of the business world conduct an appropriate analysis of the profits and costs associated with undertaking the identified venture. Where it is determined that the operational expenses overrun the associated benefits, then the business idea may not be a viable venture and may require an in-depth analysis to seal off the shortcomings related to the plan.

I will conduct a cost or benefit analysis for my business idea where I intend to start on a door to door delivery of customized products such as mugs, clothing, and gifts among other accessories that will be advertised on my online shop. The cost/benefit analysis for the above business plan could get executed in three significant steps which will help to come up with a precise cost/benefit analysis. These steps include;

1. Brainstorming on the costs and benefits involved

The business idea at hand involves various implementation processes. There will be an online shop where products are posted for the customers to view, and there is also a delivery system where customers can get their orders delivered to various locations. The products design and customization are also other aspects of the cost that need to be accounted for. These are the three high costs that are involved in the business idea that will be required to be addressed. The online shop will require a given amount to launch and support the online shop. The deliveries will also need an elaborate plan which will include the mode of transportation as well as the delivery personnel that will be employed to deliver the product.

2. Monetary value assignment to the costs and benefits

The monetary value associated with the identified expenses required to put the business into operation could be approximated to be approximately $5000. This amount will help to meet the operational costs of the online shop start-up, which will be roughly $2000. This will facilitate the website updates as well as the web hosting services. $1000, on the other hand, will be used for the acquiring of accessories that will be sold in the online shop. The final $200 will be used to develop the required transport and delivery costs. On the overrun, the business is expected to have a turnover of approximately $2000 in the initial running period and therefore, in three months, the business is expected to break even.

3. Comparison and contrast between the costs and benefits

Based on the approximate values obtained above, it is possible to identify that the gains concerning the cost are viable, and the business venture could be a sustainable enterprise. This is because the profits associated with the operation are sufficient enough to meet the required operation sustenance and running operations of the business.

Sunk or Opportunity Costs

Sunk costs are costs that referred to this way as they are costs that cannot be recovered once incurred.  According to the above business plan, it is possible to identify that there are no sunk costs associated with the business idea. This, therefore, makes the business idea the right business decision given that it is possible to recover the expenses incurred in the initial startup. On the other hand, there are individual opportunity costs associated with the business where there will be the cost that will be foregone by establishing the company on the online sphere thereby preceding the expenses incurred in rental spaces and other costs.

Conclusion

The cost/benefit analysis for the above business idea is an essential approach that can be used to determine the viability of the business, thereby helping to determine its feasibility or lack of. This, therefore, will help me as the prospective investor to overcome any losses that could have been incurred had the business been established without prior research on the cost-benefit analysis (Mishan, 2015). This, therefore, makes the decision-making process essential business aspects that managers, as well as investors, should strive to achieve to cut on losses and invest in viable business prospects.

References

Fairfax, L. M. (2005). The bottom line on board diversity: A cost-benefit analysis of the business rationales for variety on corporate boards. Wis. L. Rev., 795.

Mishan, E. J. (2015). Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

Mishan, E. J., & Euston. Quah. (1976). Cost-benefit analysis (Vol. 454). New York: Praeger.