June 20, 2011 / 1:48 PM / 8 years ago

Management Tip of the Day: Steps for cost/benefit analysis

BOSTON (Reuters) - Few people understand what really goes into the analysis behind when to make an investment or take a pass, says Harvard Business Review.

A man walks inside the Athens' stock exchange in Athens April 28, 2010. REUTERS/Yiorgos Karahalis

The Management Tip of the Day offers quick, practical management tips and ideas from Harvard Business Review and HBR.org (www.hbr.org). Any opinions expressed are not endorsed by Reuters.

“We all know we should make an investment when the benefits outweigh the costs, but few people understand what really goes into the analysis. Here are the six steps:

1. Understand the cost of status quo. You need this to measure the relative merit of an investment against the ‘do nothing’ option.

2. Identify costs. Consider up-front costs as well as any in future years.

3. Identify benefits. Ascertain what additional revenue will come in from the investment.

4. Determine the cost savings. What can you stop doing if you make this investment?

5. Create a timeline for expected costs and revenue. Map out when the costs and benefits will occur and how much they will be.

6. Evaluate non-quantifiable benefits and costs. Assess whether there are intangible benefits such as strengthening your firm’s position with distributors, or costs such as creating unnecessary complexity.”

-Today’s management tip was adapted from “Guide to Finance Basics for Managers.”

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