Cost benefit analysis

Cost benefit analysis is a method of calculating the financial benefit or loss to the company when planning change within the organisation. It is done to determine how well, or how poorly, a planned action will turn out. It finds, quantifies and adds all the positive factors. These are the benefits. Then it identifies, quantifies and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real trick to doing a cost benefit analysis well is making sure you include all the costs and all the benefits and properly quantify them. A good description is a "weighing-scale approach for decision making".

These calculations need to be done before change is implemented, to gain an understanding of the value of the change. The calculation should answer the question “Is there a benefit to implementing the change?” It is also a method for prioritising the change options to be implemented.
A frequent problem when using cost benefit analysis is accurately quantifying the benefits to be gained as they are usually soft and intangible benefits because they are most often received over time. To allow for this, a payback period is included in the calculations. A payback period is the time it takes for the benefits of the change to repay its costs. The payback time is often known as the break even point. Sometimes this is more important than the overall benefit that can be delivered.