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How to Do a Cost-Benefit Analysis & Why It’s Important

• 05 Sep 2019

Are you unsure whether a particular decision is the best one for your business? Are you questioning whether a proposed project will be worth the effort and resources that will go into making it a success? Are you considering making a change to your business, marketing, or sales strategy, knowing that it might have repercussions throughout your organization?

The way that many businesses, organizations, and entrepreneurs answer these, and other, questions is through business analytics —specifically, by conducting a cost-benefit analysis.

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What Is A Cost-Benefit Analysis?

A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective.

Generally speaking, cost-benefit analysis involves tallying up all costs of a project or decision and subtracting that amount from the total projected benefits of the project or decision. (Sometimes, this value is represented as a ratio.)

If the projected benefits outweigh the costs, you could argue that the decision is a good one to make. If, on the other hand, the costs outweigh the benefits, then a company may want to rethink the decision or project.

There are enormous economic benefits to running these kinds of analyses before making significant organizational decisions. By doing analyses, you can parse out critical information, such as your organization’s value chain or a project’s ROI .

Cost-benefit analysis is a form of data-driven decision-making most often utilized in business, both at established companies and startups . The basic principles and framework can be applied to virtually any decision-making process, whether business-related or otherwise.

Related: 5 Business Analytics Skills for Professionals

Steps of a Cost-Benefit Analysis

1. establish a framework for your analysis.

For your analysis to be as accurate as possible, you must first establish the framework within which you’re conducting it. What, exactly, this framework looks like will depend on the specifics of your organization.

Identify the goals and objectives you’re trying to address with the proposal. What do you need to accomplish to consider the endeavor a success? This can help you identify and understand your costs and benefits, and will be critical in interpreting the results of your analysis.

Similarly, decide what metric you’ll be using to measure and compare the benefits and costs. To accurately compare the two, both your costs and benefits should be measured in the same “common currency.” This doesn’t need to be an actual currency, but it does frequently involve assigning a dollar amount to each potential cost and benefit.

2. Identify Your Costs and Benefits

Your next step is to sit down and compile two separate lists: One of all of the projected costs, and the other of the expected benefits of the proposed project or action.

When tallying costs, you’ll likely begin with direct costs , which include expenses directly related to the production or development of a product or service (or the implementation of a project or business decision). Labor costs, manufacturing costs, materials costs, and inventory costs are all examples of direct costs.

But it’s also important to go beyond the obvious. There are a few additional costs you must account for:

• Indirect costs: These are typically fixed expenses, such as utilities and rent, that contribute to the overhead of conducting business.
• Intangible costs: These are any current and future costs that are difficult to measure and quantify. Examples may include decreases in productivity levels while a new business process is rolled out, or reduced customer satisfaction after a change in customer service processes that leads to fewer repeat buys.
• Opportunity costs: This refers to lost benefits, or opportunities, that arise when a business pursues one product or strategy over another.

Once those individual costs are identified, it’s equally important to understand the possible benefits of the proposed decision or project. Some of those benefits include:

• Direct: Increased revenue and sales generated from a new product
• Indirect: Increased customer interest in your business or brand
• Intangible: Improved employee morale
• Competitive: Being a first-mover within an industry or vertical

3. Assign a Dollar Amount or Value to Each Cost and Benefit

Once you’ve compiled exhaustive lists of all costs and benefits, you must establish the appropriate monetary units by assigning a dollar amount to each one. If you don’t give all the costs and benefits a value, then it will be difficult to compare them accurately.

Direct costs and benefits will be the easiest to assign a dollar amount to. Indirect and intangible costs and benefits, on the other hand, can be challenging to quantify. That does not mean you shouldn’t try, though; there are many software options and methodologies available for assigning these less-than-obvious values.

4. Tally the Total Value of Benefits and Costs and Compare

Once every cost and benefit has a dollar amount next to it, you can tally up each list and compare the two.

If total benefits outnumber total costs, then there is a business case for you to proceed with the project or decision. If total costs outnumber total benefits, then you may want to reconsider the proposal.

Beyond simply looking at how the total costs and benefits compare, you should also return to the framework established in step one. Does the analysis show you reaching the goals you’ve identified as markers for success, or does it show you falling short?

If the costs outweigh the benefits, ask yourself if there are alternatives to the proposal you haven’t considered. Additionally, you may be able to identify cost reductions that will allow you to reach your goals more affordably while still being effective.

Related: Finance vs. Accounting: What's the Difference?

Pros and Cons of Cost-Benefit Analysis

There are many positive reasons a business or organization might choose to leverage cost-benefit analysis as a part of their decision-making process. There are also several potential disadvantages and limitations that should be considered before relying entirely on a cost-benefit analysis.

Advantages of Cost-Benefit Analysis

A data-driven approach.

Cost-benefit analysis allows an individual or organization to evaluate a decision or potential project free of biases. As such, it offers an agnostic and evidence-based evaluation of your options, which can help your business become more data-driven and logical.

Makes Decisions Simpler

Business decisions are often complex by nature. By reducing a decision to costs versus benefits, the cost-benefit analysis can make this dilemma less complex.

Uncovers Hidden Costs and Benefits

Cost-benefit analysis forces you to outline every potential cost and benefit associated with a project, which can uncover less-than-obvious factors like indirect or intangible costs.

Limitations of Cost-Benefit Analysis

Difficult to predict all variables.

While cost-benefit analysis can help you outline the projected costs and benefits associated with a business decision, it’s challenging to predict all the factors that may impact the outcome. Changes in market demand, material costs, and the global business environment are unpredictable—especially in the long term.

Incorrect Data Can Skew Results

If you’re relying on incomplete or inaccurate data to finish your cost-benefit analysis, the results of the analysis will follow suit.

Better Suited to Short- and Mid-Length Projects

For projects or business decisions that involve longer timeframes, cost-benefit analysis has a greater potential of missing the mark for several reasons. For one, it’s typically more difficult to make accurate predictions the further into the future you go. It’s also possible that long-term forecasts won’t accurately account for variables such as inflation, which can impact the overall accuracy of the analysis.

Removes the Human Element

While a desire to make a profit drives most companies, there are other, non-monetary reasons an organization might decide to pursue a project or decision. In these cases, it can be difficult to reconcile moral or “human” perspectives with the business case.

In the end, cost-benefit analysis shouldn't be the only business analytics tool or strategy you use in determining how to move your organization into the future. Cost-benefit analysis isn’t the only type of economic analysis you can do to assess your business’s economic state, but a single option at your disposal.

Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market.

This post was updated on July 12, 2022. It was originally published on September 5, 2019.

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• Project planning |
• Cost-benefit analysis: 5 steps to make ...

Cost-benefit analysis: 5 steps to make better choices

A cost-benefit analysis is a process that helps you determine the economic benefit of a decision, so you can decide whether it’s worth pursuing. It’s a useful tool when you want to avoid bias in your decision-making process—especially when you’re faced with a big decision that will impact your team or project success. Cost-benefit analyses can seem daunting at first, but don’t fret—we’ve simplified the process into five concrete steps.

Calculating the social benefit of a bridge sounds like a puzzler, but not for Dupuit. He just measured how much people were willing to pay to use it. Then with some fancy calculations, he was able to recommend a toll amount that took into account the costs and benefits of his bridge.

And so, the cost-benefit analysis was born. The process has been refined since Dupuit’s day, and now it’s used less for calculating bridge tolls and more for figuring out if decisions are economically feasible. But the big picture remains the same—when it comes to decision-making, costs and benefits are key. 

What is a cost-benefit analysis? 

A cost-benefit analysis (CBA)—also called a benefit-cost analysis—is a decision-making tool that helps you choose which actions are worth pursuing. It provides a quantitative view of an issue, so you can make decisions based on evidence rather than opinion or bias.

CBA is particularly useful in project planning; it compares the financial feasibility of new projects against their potential returns.

During your analysis process, you assign monetary values to the costs and benefits of a decision—then subtract costs from benefits to determine net gains. The resulting cost-benefit ratio helps you estimate the full economic benefit (or lack thereof) of your choice so you can decide if it’s a good idea to pursue.

When should you use a cost-benefit analysis? 

A cost-benefit analysis works best when you want to decide whether to pursue a specific course of action. It also helps when your decision has clear economic costs and benefits. For example, it’s easier to create a CBA to determine the feasibility of a new project than to evaluate whether a new hire would be a good fit for your team. That’s because it’s hard to assign concrete financial costs and benefits to someone’s experience and work potential. 

This type of economic analysis also takes some time to complete, so it’s best for when you’re faced with a big decision that will impact your team or project success. For smaller or less complex decisions, try using a simpler process like a decision matrix . 

Here are some examples of when to use a cost-benefit analysis: 

Developing a new business strategy

Making resource allocation or purchase decisions

Deciding whether to pursue a new project

Comparing investment opportunities

Measuring the potential impact or desirability of new company policies

Assessing proposed changes to your company structure or processes

How to do a cost-benefit analysis

Creating a cost-benefit analysis may seem daunting at first, but we’ve simplified the methodology into five concrete steps. After you’ve run through this process once, you can tailor these steps to suit your specific project or team needs. 

1. Build a framework

First, create a framework that lays out the goals of your analysis, your current situation, and the scope of what your analysis will include. 

Your framework should include these components: 

The question your analysis will answer

A successful CBA always starts with a good question. It helps to be as specific as possible—for example, it’s easier to answer “Should we improve our mobile app?” than a broader question like “What products should we improve to drive adoption?” 

An overview of your current situation

An overview provides context for your analysis. It gives you a starting point to work from, so everyone understands where you’re coming from and why you’re considering a change. Here’s what to include in your overview: 

Background: A brief description of your current situation. 

Current performance: Quantitative data to demonstrate how things are going in your current situation.  

Opportunities: Any areas of improvement from your current situation. 

Projected future performance with the status quo: Quantitative data to predict how things will be going in the future if nothing changes. 

Risks of the status quo: What might go wrong if you don’t change anything. 

For example, imagine you’re trying to decide whether to overhaul your mobile app. Here’s what your overview might look like: 

Background: We have a mobile app and web app. 

Current performance: Our mobile app has 100k users and our web app has 400k users.

Opportunities: We have 300k users who use the web app but not mobile. 

Projected future performance with status quo: Adoption of our web app has grown 50% YoY. We project this will continue and there will be 600k users one year from now. Meanwhile, adoption of our mobile app has grown 10% YoY. We project this will continue and there will be 110k users one year from now. 

Risks of status quo: Lack of mobile adoption means users have less flexibility. Competitors with better mobile apps could win the category, while our brand may become known for having a poor mobile experience. Without an effective mobile app, we’re missing out on a large number of potential app users. 

When building a cost-benefit analysis framework, it's important to accurately estimate the expected costs associated with your decision, including both direct and indirect expenses.

The scope of your analysis

Finally, your framework should include the scope of your CBA. Like a project scope , this creates boundaries for your analysis and lays out what type of information you’ll consider in your calculations (plus what you won’t consider). Typically, your scope includes: 

The timeframe over which you’ll estimate potential costs and expected benefits. For example, you may decide to limit projections to one year from now. 

The types of costs and benefits you’ll include (or exclude). For example, you could decide to include labor costs and resources, but not opportunity costs. 

How you’ll measure costs and benefits. For example, you may assign dollar values to measure tangible costs like labor and resources, and assign key performance indicators (KPIs) to measure intangible costs or benefits like brand awareness. 

2. List and categorize costs and benefits

Next, it’s time to list all the costs and benefits of your decision. For this step, it’s helpful to collaborate with stakeholders so you can benefit from their specific expertise (for example, your IT team would be able to estimate how much new software would cost). Think of your decision like a project you’ll complete to achieve your proposed course of action. Ask yourself what resources you need (like materials or labor), and what the results of your decision will be (like additional revenue). 

As you list out costs and benefits, sort them into the following categories. Then in the next step, you’ll estimate dollar amounts of each of these items.  

Types of costs

Direct costs: Costs associated with the production of your product, service, or project. This is typically the materials, equipment, or labor you need to follow through on your proposed course of action. For example, these could be the direct cost of revamping your mobile app: product team hours, a contract with a user testing firm, and new development software. 

Indirect costs: Fixed costs that aren’t directly associated with production. These are typically ongoing overhead costs that you need to operate your business—like rent, utilities, or transportation fees. For example, these might be the indirect costs to create a new mobile app: internet for your remote development team, plus subscriptions to new development and collaboration software .

Intangible costs: Costs that you can’t assign a dollar amount to, like impacts to brand perception or customer satisfaction. This might also include opportunity costs, which are lost opportunities when you make one decision instead of another. For example, you could include this intangible cost for your app creation project: decreased satisfaction for prospective desktop users. This is an opportunity cost, since you’re choosing to upgrade your mobile app instead of creating a desktop app. 

Costs of potential risks: Costs associated with unexpected roadblocks. In other words, what you’ll need to spend money on if an unforeseen event knocks your project off track. Think of setbacks you would include in a project risk register —like data security breaches, scheduling delays, or unplanned work. For example, you might list these potential costs for your mobile app project: overtime pay for unplanned work, data security team hours to resolve unforeseen app privacy issues, and rush rates to accommodate for scheduling delays. 

When listing out tangible costs (like direct and indirect costs), follow the same process you would when creating a project budget . Think of all the tasks you need to complete to follow through on your decision, then list out the resources required for each deliverable. For intangible costs, you’ll have to use a bit more creativity. If you’re stuck, try looking at similar projects that have been completed in the past to see what type of impact they had. 

Types of benefits

Direct benefits: Benefits you can measure with a currency value, like the revenue you’ll gain from a project. For example, this could include revenue from new mobile app subscriptions. 

Indirect benefits: Benefits you can perceive but can’t measure with currency values. For example, this could include increased customer satisfaction and improved brand awareness.

3. Estimate values

Now it’s time to estimate the value of each cost and benefit you’ve listed. This is most straightforward for tangible categories you can assign a specific dollar amount to—like direct costs, indirect costs, and direct benefits. For intangible categories like intangible costs and indirect benefits, assign KPIs in lieu of monetary units. For example, you could measure customer satisfaction by tracking customer churn rate (the rate at which customers stop using your service). If you can, use the same KPIs for both costs and benefits so you can easily compare them later. 

We can’t predict the future, so these are ultimately just estimates. To make your calculations as accurate as possible, try comparing costs and benefits from similar projects you’ve completed in the past. Old projects are a gold mine of historical data and lessons learned . They can help you see the real-life economic value of past costs and benefits—plus any items or circumstances you might have overlooked. Using a project management tool can make this step easy—since all of your project information and communications are housed in one place, you can easily look back at past initiatives. 

4. Analyze costs vs. benefits

Now comes the fun part—the actual analysis of your costs and benefits. Before you get started, here are some key terms to keep in mind: 

Total costs: The sum of all costs.

Total benefits: The sum of all benefits.

Net cost-benefit: Total benefits minus total costs. This is also called net benefits. 

Net present value (NPV): The difference between the present value of cash inflows and the present value of cash outflows over a period of time. In simpler terms, net present value is a more dynamic way to measure net cost-benefit, because it includes how your net cost-benefit will change over a period of time. 

Internal rate of return (IRR): Calculates the profitability of an investment by determining the annualized return rate that makes the total value of all cash flows (positive and negative) from the investment balance out to zero. 

Benefit-cost ratio : Represents the overall relationship between costs and benefits over a period of time. It’s essentially the proposed total cash benefit divided by the proposed total cash costs—but to make the calculation more dynamic, you calculate the net present value of your costs and benefits over the proposed lifetime of your project. If your benefit-cost ratio is greater than one, that means benefits outweigh costs. 

Discount rates : Used to estimate how the values of your costs and benefits will change over a long period of time—for example, how they might be influenced by inflation. In other words, discount rates are essentially an interest rate you apply to costs and benefits that will occur in the future, so you can convert them into their present value. That way, you can more accurately estimate what the time values of future  costs and benefits would be worth today. 

Sensitivity analysis : Determines how uncertainty affects your decisions, costs, and profits. For example, you could use a sensitivity analysis to compare the worst- and best-case scenarios for your decision. If the worst-case scenario has more costs than benefits, you can look into strategies to mitigate some of those risks. 

These are a lot of fancy terms, but don’t let that scare you. If you don’t want to include more complex calculations like net present value, benefit-cost ratio, discount rates, and sensitivity analysis, you don’t have to. To keep things simple, you can just calculate your net cost-benefit and leave it at that. 

If you used KPIs to measure intangible costs and benefits, you can compare those separately. To analyze KPIs, there are a couple different approaches: 

If you have the same KPIs for costs and benefits, you can subtract costs from benefits to calculate net gains. For example, if you estimate a 5% increase in churn rate due to your decision not to pursue a desktop app and a 20% decrease in churn rate due to your new mobile app, you would have a net 15% decrease in churn rate. 

If you have different KPIs for costs and benefits, you can compare each one to the status quo. For example, you could compare predicted churn rate to your current churn rate, and predicted adoption rates to current adoption rates. This gives you a better idea of the magnitude of these costs and benefits—but at the end of the day, you’ll need to make a subjective decision about how much you value each different KPI. As such, it’s better to use the same metrics for costs and benefits so you can more accurately compare them. 

5. Make recommendations

Now that you’ve completed your cost-benefit analysis (huzzah!), you can make a recommendation. Here are some factors to consider for your decision: 

If your net cost-benefit is positive, that means the benefits of the project outweigh the costs. However, it’s important to consider the size of your net cost-benefit—if it’s too small, you might not be getting much benefit from all the effort you put in. In that case, you may want to consider an alternative decision. 

If your net cost-benefit is negative, that means your project costs outweigh the benefits. In this case, it’s helpful to consider what the biggest cost inputs are. Is there a different approach you could take that would mitigate some of those extra costs? 

If you used KPIs to measure intangible costs and benefits, you need to consider those in addition to your net cost-benefit. For example, if your net cost-benefit was relatively small but you calculated a large decrease in churn rate, your mobile app project may be worth pursuing after all. 

Cost-benefit analysis examples

Cost-benefit analysis offers valuable insights by quantifying and comparing the pros and cons of different choices. Here are three practical examples demonstrating how cost-benefit analysis can be applied in three different scenarios.

Cost-benefit analysis example 1: Implementing new software in a small business

The decision to upgrade software systems in a small business presents a classic case for cost-benefit analysis.

On one side, there's the initial financial outlay and the training costs for employees.

On the other hand, the benefits include improved efficiency, faster customer service, and long-term savings.

By quantifying these factors, a business can determine whether an investment in new technology will yield a favorable return on investment.

Cost-benefit analysis example 2: Assessing the impact of new environmental regulations

A manufacturing company faces new environmental regulations requiring significant changes in its processes.

The cost-benefit analysis here involves comparing the upfront costs of altering equipment and workflows with the long-term benefits, such as:

Reduced environmental impact

Compliance with legal requirements

Potential improvements in public image

This analysis helps decision-makers understand whether the benefits of adhering to these new regulations outweigh the associated costs.

Cost-benefit analysis example 3: Evaluating an urban public transportation expansion

A thorough cost-benefit analysis is essential when a city is thinking about growing its public transportation system. 

This involves calculating the direct costs of construction and operation expenses against the benefits, including:

Reduced traffic congestion

Lower pollution levels

Improved accessibility for residents

By assessing these factors, the city can decide if the project's long-term benefits justify the significant initial investment.

Pros and cons of cost benefit analysis

Understanding both the advantages of cost analysis and its limitations is important for decision-makers. Let's look at what makes cost-benefit analysis a powerful, but not always simple, tool.

Advantages of cost analysis

Streamlining decision-making processes: Cost-benefit analysis aids in simplifying complex decisions by translating them into quantifiable terms. This approach is particularly useful in scenarios where return on investment and cost effectiveness are key considerations.

Revealing overlooked costs and advantages: Some benefits or expenses are not immediately apparent, but a thorough cost-benefit analysis makes them clear and guarantees a thorough evaluation.

Emphasizing a data-centric method: By focusing on quantifiable data, such as estimated costs and forecasted benefits, cost-benefit analysis promotes objectivity, reducing the influence of subjective biases.

Limitations of cost-benefit analysis

Cost-benefit analysis is a handy tool for data-driven decision making . But like any estimation technique, it isn’t perfect. When deciding whether to use a cost-benefit analysis or another decision-making process, keep in mind these limitations: 

Revenue and cash flow can be unpredictable due to changing market conditions.

In some cases, the costs or benefits of a project or decision can’t be directly reflected by dollar amounts. 

Value is subjective when you use KPIs to measure intangible costs and benefits. 

It can be hard to accurately predict all potential risks. 

A cost-benefit analysis requires a significant time commitment to complete. 

Forecasting accuracy diminishes for projects extending over a long period, affecting the reliability of the analysis.

The complexity of accurately predicting every variable, such as future costs and intangible benefits, poses a challenge.

The effectiveness of cost-benefit analysis depends on the accuracy of the data used. Misleading or incorrect data can result in flawed conclusions.

If you decide that a cost-benefit analysis isn’t the right fit for your particular situation, you may want to consider creating a decision matrix or decision tree analysis instead. 

Make decisions count

A cost-benefit analysis helps you use data to make the best possible decision. That means you can say goodbye to coin flips and choose your options with confidence. 

Creating a cost-benefit analysis can seem like a project in its own right, especially if you’re working with multiple stakeholders to get the job done. Before you dive in, consider using a project management tool to coordinate work. Asana lets you create and assign tasks, organize work, and communicate with stakeholders directly where work happens. You can also map out your entire cost-benefit analysis project and save it as a template for future use.

Related resources

What is stakeholder analysis and why is it important?

How Asana uses work management to optimize resource planning

Understanding dependencies in project management

Unmanaged business goals don’t work. Here’s what does.

Mastering Cost Benefit Analysis: Techniques, Examples, and Templates for Success

Cost benefit analysis is a crucial methodology for determining if a project or investment is economically viable and worth pursuing. This comprehensive guide will provide techniques, real-world examples, and templates to master conducting accurate and effective cost-benefit analyses. 

A cost-benefit analysis systematically compares the total expected costs of a project against its total expected benefits to determine if it makes economic sense. Properly performed cost benefit analyses can provide organization leaders the insight needed to make smart capital allocation decisions between potential projects and investments. 

By the end of this guide, you will understand what cost benefit analysis entails, why it is an indispensible business methodology, and have practical knowledge to start performing cost-benefit analysis on your own projects and investments. Let's dive in!

What is Cost Benefit Analysis and Why is it Important?

Cost benefit analysis, sometimes referred to as benefit-cost analysis or CBA, is a methodology to calculate and compare the benefits and costs associated with a project or decision. The process involves adding up the benefits expected from an initiative, including both tangible and intangible benefits, and then comparing those total benefits against the total costs associated with the project.

The outcome of a cost-benefit analysis determines whether the projected benefits of a project outweigh the projected costs, serving as a guide for organization leaders to make decisions on whether to move forward with a project or choose an alternative. Cost benefit analysis provides an objective economic framework for evaluating potential capital allocations and project decisions.

There are several key reasons why properly conducting cost benefit analysis is a crucial methodology for any data-driven business leader or project manager:

Cost benefit analysis quantifies total benefits and costs to facilitate an apples-to-apples comparison. This enables business leaders to evaluate projects based on net economic impacts rather than relying solely on intuition.

Cost benefit analysis accounts for both tangible and intangible costs and benefits through methodologies like shadow pricing and willingness-to-pay surveying. This provides a more holistic evaluation of the total value created by a project. 

CBA incorporates the time value of money so that costs and benefits correctly reflect present values. This enables appropriate comparison of short and long-term projects and ensures the true economic cost or benefit is captured.

Cost benefit analysis provides an objective project evaluation methodology for business leaders to identify the project or investment offering the optimal return on spend and economic value.

In summary, cost benefit analysis is the essential methodology for any business leader or project manager to justify project investments and capital allocation decisions in an economically rational way aligned to maximizing overall welfare impacts. Demonstrating competency in preparing cost benefit analysis is a must-have arrow in any analytical professional's quiver.

Now let's explore the key techniques and steps to perform accurate cost benefit analyses following best practices...

How to Conduct a Cost Benefit Analysis: 7 Key Steps

Conducting cost-benefit analysis may sound straightforward, but properly accounting for all tangible and intangible factors takes skill and practice. Here is an overview of the seven key steps to follow when performing a cost benefit analysis:

1. Clearly Define Project Scope and Time Horizon

The first step is to clearly define the scope and time horizon for analysis. What specific deliverables define project success? Over what duration will costs and benefits be tracked? Defining analysis setting provides focus for subsequent estimating steps. 

2. Comprehensively Estimate Project Costs

With scope defined, comprehensively specify and quantify all estimated costs associated with the project. Cost benefit analysis aims to capture total cost of ownership across the lifetime of the asset, project, or decision. 

Be sure to include:

Direct project costs: Development, production, construction expenses 

Associated indirect costs: Overhead expenses tied to project 

Operating and maintenance costs: Sustaining, ramping expenses over project lifetime  

Intangible costs: Negative externalities such as environmental, health or social impacts

Capturing total cost is essential for cost-benefit analysis integrity. Often, sizable cost burdens hide in ancillary expenses or maintenance costs rather than big ticket development line items. Cast a wide net when specifying associated expenses. 

3. Comprehensively Estimate Project Benefits

Next, thoroughly estimate all tangible and intangible benefits anticipated from the project. Consider all potential value streams and use methodologies like willingness-to-pay surveys to assign monetary values:

Direct economic benefits: Revenue increases, expense reductions  

Indirect benefits: Externality improvements tied to project

Intangible benefits: Brand, cultural, social value created 

Don't just focus on direct economic returns. For example, a project focused on improving environmental sustainability may deliver immense social benefit and brand equity despite limited direct cost savings. Be exhaustive enumerating potential benefit categories. 

4. Incorporate Time Value of Money

Because costs and benefits often accrue over multi-year timeframes, properly accounting for TVM (time value of money) using net present value and discount rate methodologies is essential for accurately evaluating projects on an apples-to-apples basis. 

For example, a $1 million expense today is more "costly" than $1 million outlaid 5 years in the future due to what that money could earn in interest during that intervening period. Apply TVM methodologies like discounted cash flow analysis using appropriate discount rates set by finance leadership. 

5. Calculate Key Economic Viability Metrics

With properly captured present value costs and benefits, calculate:  

Net benefits = Total discounted benefits - Total discounted costs

Benefit-cost ratio = Total discounted benefits / Total discounted costs 

NPV = Present value of benefits - present value of costs

ROI = (Net benefits ÷ total costs) × 100

IRR = Discount rate at which NPV equals $0 

Looking across viability metrics provides a multidimensional lens into overall net economic impact, relative return multiple, total dollar value added, percentage return rate, and internal attractiveness for benchmarking across investment options. Generally positive metrics indicates an economically justifiable project.

6. Conduct Rigorous Sensitivity Analysis

Sensitivity analysis evaluates result variability given different input cost and benefit assumptions. Test multiple scenarios reflecting conservative, probable, and aggressive projections. 

Examine if positive project economics hold up across good-case and downside scenarios. For example, if a project only pays off given optimistic benefit recognition, it likely carries substantial risk. Exposing this insight enables smarter capital allocation decisions aligned to organizational risk tolerance.

7. Make Informed Go/No Go Decision

With rigorous cost benefit analysis complete, the final step sits with leadership to make an informed go/no go decision considering both the economics as well as qualitative strategic factors.

Revisit business priorities - does the project further critical goals? Weigh risks identified through sensitivity analysis. Review future opportunity costs potentially displaced by committing capital and resources to this project. 

With all this insight synthesized, leadership can confidently greenlight or halt the project. Share back the completed cost benefit analysis to provide transparency into the decision rationale.

Cost Benefit Analysis Example

Let's walk through a real world cost benefit analysis example focused on the potential launch of an ecommerce channel for an existing national retailer selling consumer electronics products.

We will evaluate adding a transactional web storefront to complement the company's current brick-and-mortar retail locations throughout the analysis. The time horizon for evaluating costs and benefits will span 5 years to fully capture the initial ramp period along with steady state economics.

Here is an overview of the key tangible and intangible cost and benefit factors identified for this analysis:

Key Cost Drivers  

Ecommerce platform buildout and site development expenses

Incremental overhead tied to managing separate distribution center for online fulfillment

Ongoing costs for digital marketing and customer acquisition

Key Benefit Drivers

Increased overall revenue from new online transaction channel

Lower fulfillment costs selling direct-to-consumer online

Improved brand visibility and convenience driving increased overall market share

Let's plug these drivers into a cost benefit analysis template to evaluate potential online storefront launch:

-- Walk through example analysis --

Evaluating the complete five year cost-benefit analysis reveals meaningful upside driving a strong business case for greenlighting the ecommerce initiative. 

Leadership gains essential data-backed validation that developing and launching an online sales channel would deliver tremendous value to the retailer through digital revenue upside, lowered fulfillment costs from direct shipping, and modernized brand equity.

The ~$5.5 million investment pays back in under 3 years given probable adoption ramp. And the initiative offers an ROIs of 420% overall and 65% IRR over the five year horizon. Those returns handily warrant deploying capital towards the project to round out an omni-channel distribution strategy.

Cost Benefit Analysis Best Practices

Beyond the methodology covered above, applying the following best practices will further improve the rigor, accuracy, and ultimate business influence of your organization's cost benefit analyses efforts:  

Account for opportunity cost - Remember to factor in value potentially lost from alternative uses of capital or other projects that funding choice may displace 

Leverage accurate finance parameters - Seek guidance from finance stakeholders on current discount rates and macroeconomic assumptions reflecting organization capital costs and constraints

Refine uncertainty ranges - Prioritize variables with largest impact or uncertainty for scenario testing using representative distributions vs arbitrary +-10% 

Regularly revisit past analyses - Periodically review analyses for completed projects to improve future estimating and modeling

Enrich with non-financial factors - Supplement analysis with commentary on strategic alignment, execution risks, and other qualitative considerations 

Properly scoping all cost and benefit drivers, clearly documenting assumptions, and leveraging accurate finance inputs goes a long way towards producing reliable analysis that leadership can confidently leverage to steer resources towards value-accretive projects. 

Conclusion and Next Steps

We've covered extensive ground exploring cost benefit analysis best practices, techniques for producing accurate analyses, real world examples, and templates to structure your own analyses.

The savvy business leader leverages cost benefit analysis to objectively evaluate proposals and identify high value-adding initiatives expected to deliver strong risk-adjusted returns on invested capital.

Confidently implementing analyses following the principles outlined positions organizations to tilt resource allocation towards programs poised to drive bottom line growth, maximize societal welfare, and surface non-financial strategic insights for leadership.

Cost Analysis: What Is It and Why Is It Used?

Rebeca Bichachi , Product Marketing Specialist

September 8, 2022

Clean data and quality reports are traditionally the result of painstaking efforts to gather the required information and organize it meaningfully quickly enough to ensure relevance. Companies can do better.

To deliver valuable business insights and rich comparative reports, any kind of business analysis needs to follow an organized approach, beginning with gathering and sorting data. Cost analysis follows much of the same methodical process but maintains a narrow focus on the total costs for a company’s goods and services. That close tracking and examination of cost patterns enables organizations to identify what may be driving spending higher, determine if they are getting enough value for their money and understand if there are alternative materials, suppliers or processes worth exploring.

This systematic review categorizes expenditures by their direct and indirect effects on goods and services produced. Once you have this data, you can review costs, revenues and profit margins and compare and analyze spending by product, location and across different levels of the business. 

Understanding how your organization generates costs, spends money and where improvements may be found can make all the difference when margins are tight and competition is fierce.

For business leaders determined to make informed decisions, the first step is to ensure the information at hand reflects an accurate business position. Confidence in data inputs and understanding of informational outputs help finance leaders create more accurate budgets, plan better and control cost drivers. But manual processes for gathering data, calculating variances and analyzing comparisons consume a substantial amount of time and effort that companies can scarcely afford — not to mention often delivering incomplete or error-filled results.

Challenge: Unorganized, Inconsistent Data

Faced with the challenge of obtaining and aligning data from multiple sources, most companies try their best to piece it all together. But a constant need for ever-more accurate and timely information clashes with complex and manual cost accounting processes, where methods of allocations, analysis and comparisons typically involve manual and repetitive entries, multiple tabs and dozens of summary spreadsheets.

Without timely and automated coverage and analysis of each angle and level of the business, the risk of errors and omissions increases exponentially. Missed opportunities for expansion, course correction and savings can prove costly. Like an arrow launched from a bow slightly off course, imperfect and stale data used in cost budgets and forecasts can yield wildly off target results or worse — provide an advantage for competitors.

The answer: A solid foundation on which to analyze reports and accurate, timely information to form assumptions. Both are critical in cost analysis.

Automate Cost Analysis with Oracle NetSuite

Automating repetitive tasks like data collection and reporting ensures uniformity and consistent application of rules. Accounting databases primed with this normalized data can then retrieve critical information in an organized, timely manner. That supports better decisions and frees up time for value-added activities and analysis.

NetSuite, an accounting software suite dedicated to automation, instantly captures, categorizes, calculates and analyzes transactions with synced data, automated allocations and journal entries and live dashboards and KPIs. Saved searches and configurable reports simplify analysis, ensuring that current information is automatically displayed in an organized fashion by location, product line and customizable classifications.

Forget the struggle of sorting data, updating spreadsheets and racing against time. NetSuite provides the precise data capabilities companies need for comprehensive cost analysis and automates these procedures, ensuring better control over your decisions — and your business.

Learn more about the cost analysis capabilities in NetSuite by joining our upcoming webinar, Automating Cost Analysis (opens in new tab) .

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Home > Business > Operations

Cost-Benefit Analysis 101: A Practical Guide for Small Business Owners

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As a small business owner, every decision you make has a ripple effect on your bottom line. 

That's where a cost-benefit analysis comes in. It’s a powerful tool that helps you weigh the pros and cons of a particular decision so you can make more informed choices for your company. 

We'll explain what a cost-benefit analysis is, when to use it, and how to create a cost-benefit analysis. 

By signing up I agree to the Terms of Use and Privacy Policy .

What is a cost-benefit analysis?

A cost-benefit analysis is a systematic approach to determining the potential costs and benefits of a decision or project.

It helps you assess whether the advantages of the decision outweigh the costs in the long run.

It involves identifying, quantifying, and comparing different factors to determine the most favorable option.

By conducting a cost-benefit analysis, you can gain a better understanding of the financial outcomes of your choices, helping you make well-informed business decisions.

When should you run a cost-benefit analysis?

Creating a cost-benefit analysis can be helpful in numerous situations.

A cost-benefit analysis can help you evaluate the financial impact of major investments like buying new equipment , expanding your office space, or upgrading technology.

If you’re considering introducing a new product or service, a cost-benefit analysis can also help you assess if the potential revenue generated will justify the cost. It can help you set competitive prices and better allocate resources.

Here are some other instances when conducting a cost-benefit analysis can be beneficial:

• Prior to launching a marketing campaign
• When evaluating employee compensation and benefits packages
• Weighing investment opportunities
• When considering implementing environmentally friendly practices or initiatives
• Before implementing major organizational changes, such as restructuring, mergers or acquisitions
• Before adopting a new software system

How to create a cost-benefit analysis step-by-step

There’s no tried and true way to conduct a cost-benefit analysis, but they all share a few common steps.

1. Identify a framework

The first step in creating a cost-benefit analysis is to clearly define the decision you need to make. Whether it's investing in new equipment, expanding your marketing efforts or hiring additional staff, clarifying your purpose will set the stage for your analysis.

Just like with any project, you’ll need to set boundaries. Decide on the timeframe you'll consider for estimating costs and benefits. Maybe you'll limit it to a year from now or project 10 years in the future.

Also, think about the types of costs and benefits you want to include or exclude. For example, you might consider labor costs and resources but exclude opportunity costs.

And don't forget how you'll measure those costs and benefits. Assign dollar values to the tangible stuff like labor and resources, and use key performance indicators for the intangibles, like brand awareness.

2. Identify both costs and benefits

Next, you want to dive into the specific types of costs and projected benefits of your project.

This may sound simple, but there’s a lot to consider.

Here's how you can approach this step.

Types of costs

• Direct costs: These are the costs directly associated with the project you’re considering. This can include purchasing new equipment or buying raw material to launch a new product.
• Indirect costs: These are usually on-going business expenses, such as utilities, rent, and administrative overhead costs.
• Intangible costs: These are potential drawbacks of the project that might be hard to quantify. This can include things like customer dissatisfaction, employee morale, and your brand’s reputation.
• Opportunity costs: This refers to the revenue or benefits you might miss out on by pursuing one decision over another.

Types of benefits

• Direct: These are benefits you can assign a dollar amount to, such as increased revenue and cost savings.
• Indirect: These benefits are harder to quantify, such as increased productivity and time saved.
• Intangible: This can include things like improved customer satisfaction and employee retention.

3. Assign monetary value

Now that you’ve mapped out the foundation of your analysis, it’s time to add dollar amounts to each cost and benefit.

These numbers help create a more accurate analysis.

Assigning a dollar value to direct costs and benefits is usually pretty easy and straightforward. Quantifying intangible costs and benefits, on the other hand, can be more challenging.

Using historical data from similar projects you’ve completed in the past can give you a roadmap of potential costs for your current analysis.

Using project management software , such as Asana or Zoho Projects , can make this step easy.

You might also consider consulting with professionals who have expertise in the area you're evaluating. They can help assign monetary values based on their industry knowledge.

Finally, a little market research goes a long way. Gathering data on market trends and consumer behavior gives you some real-world perspective when assigning dollar amounts.

In cases where it’s difficult to assign a specific dollar amount to intangible costs and indirect benefits, consider using key performance indicators instead.

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4. crunch the numbers and compare.

Once you’ve assigned monetary values to the costs and benefits, it's time to crunch the numbers and compare the results.

First, add up all the costs you identified earlier. Then, sum up all the benefits. You can use a spreadsheet or comparison table to give you a comprehensive view of both categories.

Let’s assume the total costs come out to $10,000, while the total benefits add up to $15,000.

Next, calculate the net benefits by subtracting the total costs from the total benefits. In our example, the net benefits would be $5,000: $15,000 (benefits) - $10,000 (costs).

A positive net benefit indicates that the benefits outweigh the costs, which means you’re looking at a potentially smart business decision.

On the flip side, a negative net benefit suggests that the project or service will cost more than its potential payoff.

You can also calculate the benefit-cost ratio (BCR). To find the BCR, divide the total benefits by the total costs. In our example, the BCR would be 1.5 ($15,000 / $10,000).

A BCR greater than 1 indicates that benefits outweigh the costs.

Some cost-benefit analyses may require a more thorough examination. This could involve:

• Discount rates: Discount rates are employed to estimate how the values of costs and benefits will change over a long period of time. It takes factors like inflation into account. Essentially, discount rates function like an interest rate applied to costs and benefits expected to occur in the future, enabling their conversion into present value. This approach provides a more accurate estimate of their current worth.
• Sensitivity analysis: Sensitivity analysis explores the impact of uncertainty on decisions, costs and profits. It allows for a comparison of worst-case and best-case scenarios to assess the potential outcomes of a decision.

5. Make an informed decision

Armed with the results of your cost-benefit analysis, it's time to make an informed decision and share your results with others.

Evaluate the net benefits, benefit cost ratio and the impact of potential risks on your decision. Consider the importance of non-financial factors as well, such as long-term company goals and your business's values.

Even if your cost-benefit analysis yields a positive result, it’s important to evaluate your company’s resources. For example, even if upgrading the company website is a net positive, your company might not have enough funds to pursue the project right away.

If your net cost-benefit turns out to be negative, it means the costs are outweighing the benefits.

Analyze the situation and identify the most costly items, then brainstorm ways to cut those extra expenses. There may be alternative approaches you can take to help you achieve a better balance.

Advantages of using cost-benefit analysis

One of the biggest advantages of using a cost-benefit analysis is objective decision making.

By assigning monetary values to costs and benefits, you can analyze the numbers while reducing the influence of personal bias.

This objectivity helps you make decisions based on facts and data rather than on gut feelings and guesswork.

Conducting a cost-benefit analysis also provides you with valuable insights, which helps you create more accurate financial forecasts and develop realistic budgets. It makes it easier to identify potential cost savings or revenue-generating opportunities.

Finally, a cost-benefit analysis provides a strong framework for presenting information to stakeholders, investors, partners, and employees.

By quantifying the costs and benefits in an easy-to-understand format, you can clearly communicate the rationale behind your decisions to other people.

Downsides of using cost-benefit analysis

A cost-benefit analysis can be a great tool in your financial planning toolbox. However, it’s far from perfect, so understanding its limitations is key.

First off, a cost-benefit analysis is subjective. When you start putting dollar values on intangible costs and benefits, things can get a bit blurry. Different people may have different opinions on what each factor is truly worth, making it tough to reach a unanimous decision.

For example, how do you put a price tag on employee satisfaction or customer loyalty? It's not as easy as tallying up receipts. This can leave you with an incomplete picture of the real costs and benefits at play.

Another limitation? Estimating future costs and benefits in today's dollars can be tricky. Failing to account for factors like inflation can skew your analysis and lead to inaccurate conclusions. And predicting future inflation — especially for long-term, multi-year projects — is difficult.

Similarly, unexpected events or market changes can throw a wrench in your plans. If your revenue suddenly plunges next year due to a recession, you may have less money to fund your new project than you projected in your cost-benefit analysis.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. She focuses on small businesses, retirement, investing and taxes.

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Cost-Benefit Analysis

Deciding, quantitatively, whether to go ahead.

By the Mind Tools Content Team

(Also known as CBA and Benefit-Cost Analysis)

Imagine that you've recently taken on a new project, and your people are struggling to keep up with the increased workload.

You are therefore considering whether to hire a new team member. Clearly, the benefits of hiring a new person need to significantly outweigh the associated costs.

This is where Cost-Benefit Analysis is useful.

CBA is a quick and simple technique that you can use for non-critical financial decisions. Where decisions are mission-critical, or large sums of money are involved, other approaches – such as use of Net Present Values and Internal Rates of Return – are often more appropriate.

About the Tool

Jules Dupuit, a French engineer and economist, introduced the concepts behind CBA in the 1840s. It became popular in the 1950s as a simple way of weighing up project costs and benefits, to determine whether to go ahead with a project.

As its name suggests, Cost-Benefit Analysis involves adding up the benefits of a course of action, and then comparing these with the costs associated with it.

The results of the analysis are often expressed as a payback period – this is the time it takes for benefits to repay costs. Many people who use it look for payback in less than a specific period – for example, three years.

You can use the technique in a wide variety of situations. For example, when you are:

• Deciding whether to hire new team members.
• Evaluating a new project or change initiative.
• Determining the feasibility of a capital purchase.

However, bear in mind that it is best for making quick and simple financial decisions. More robust approaches are commonly used for more complex, business-critical or high cost decisions.

How to Use the Tool

Follow these steps to do a Cost-Benefit Analysis.

Step One: Brainstorm Costs and Benefits

First, take time to brainstorm all of the costs associated with the project, and make a list of these. Then, do the same for all of the benefits of the project. Can you think of any unexpected costs? And are there benefits that you may not initially have anticipated?

When you come up with the costs and benefits, think about the lifetime of the project. What are the costs and benefits likely to be over time?

Step Two: Assign a Monetary Value to the Costs

Costs include the costs of physical resources needed, as well as the cost of the human effort involved in all phases of a project. Costs are often relatively easy to estimate (compared with revenues).

It's important that you think about as many related costs as you can. For example, what will any training cost? Will there be a decrease in productivity while people are learning a new system or technology, and how much will this cost?

Remember to think about costs that will continue to be incurred once the project is finished. For example, consider whether you will need additional staff, if your team will need ongoing training, or if you'll have increased overheads.

Step Three: Assign a Monetary Value to the Benefits

This step is less straightforward than step two! Firstly, it's often very difficult to predict revenues accurately, especially for new products. Secondly, along with the financial benefits that you anticipate, there are often intangible, or soft, benefits that are important outcomes of the project.

For instance, what is the impact on the environment, employee satisfaction, or health and safety? What is the monetary value of that impact?

As an example, is preserving an ancient monument worth $500,000, or is it worth $5,000,000 because of its historical importance? Or, what is the value of stress-free travel to work in the morning? Here, it's important to consult with other stakeholders and decide how you'll value these intangible items.

Step Four: Compare Costs and Benefits

Finally, compare the value of your costs to the value of your benefits, and use this analysis to decide your course of action.

To do this, calculate your total costs and your total benefits, and compare the two values to determine whether your benefits outweigh your costs. At this stage it's important to consider the payback time, to find out how long it will take for you to reach the break even point – the point in time at which the benefits have just repaid the costs.

For simple examples, where the same benefits are received each period, you can calculate the payback period by dividing the projected total cost of the project by the projected total revenues:

Total cost / total revenue (or benefits) = length of time (payback period).

Custom Graphic Works has been operating for just over a year, and sales are exceeding targets. Currently, two designers are working full-time, and the owner is considering increasing capacity to meet demand. (This would involve leasing more space and hiring two new designers.)

He decides to complete a Cost-Benefit Analysis to explore his choices.

Assumptions

• Currently, the owner of the company has more work than he can cope with, and he is outsourcing to other design firms at a cost of $50 an hour. The company outsources an average of 100 hours of work each month.
• He estimates that revenue will increase by 50 percent with increased capacity.
• Per-person production will increase by 10 percent with more working space.
• The analysis horizon is one year: that is, he expects benefits to accrue within the year.

He calculates the payback time as shown below:

$139,750 / $305,500 = 0.46 of a year, or approximately 5.5 months.

Inevitably, the estimates of the benefit are subjective, and there is a degree of uncertainty associated with the anticipated revenue increase. Despite this, the owner of Custom Graphic Works decides to go ahead with the expansion and hiring, given the extent to which the benefits outweigh the costs within the first year.

Flaws of Cost-Benefit Analysis

Cost-Benefit Analysis struggles as an approach where a project has cash flows that come in over a number of periods of time, particularly where returns vary from period to period. In these cases, use Net Present Value (NPV) and Internal Rate of Return (IRR) calculations together to evaluate the project, rather than using Cost-Benefit Analysis. (These also have the advantage of bringing "time value of money" into the calculation.)

Also, the revenue that will be generated by a project can be very hard to predict, and the value that people place on intangible benefits can be very subjective. This can often make the assessment of possible revenues unreliable (this is a flaw in many approaches to financial evaluation). So, how realistic and objective are the benefit values used?

Cost-benefit analysis is a relatively straightforward tool for deciding whether to pursue a project.

To use the tool, first list all the anticipated costs associated with the project, and then estimate the benefits that you'll receive from it.

Where benefits are received over time, work out the time it will take for the benefits to repay the costs.

You can carry out an analysis using only financial costs and benefits. However, you may decide to include intangible items within the analysis. As you must estimate a value for these items, this inevitably brings more subjectivity into the process.

San Jose State University Department of Economics. (2012). An Introduction to Cost Benefit Analysis. (Available here .) [Accessed 4 September, 2012.]

Griffin, R.C. (1998). 'The Fundamental Principles of Cost-Benefit Analysis,' Water Resources Research, Volume 34, Number 8, August 1998. (Available here) .

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cyndi lynch

I don't understand why the Costs section was repeated 12 times.

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What is Cost Benefit Analysis?

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Our content and product recommendations are editorially independent. We may make money when you click links to our partners. Learn more in our  Editorial & Advertising Policy .

A cost-benefit analysis, or CBA, is a simple comparison of the projected or estimated business costs or opportunities of a project against the benefits to the business. Experienced project managers know that Insights gained from this exercise are invaluable when planning and forecasting work.

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The Importance of Cost-Benefit Analysis

Business decisions are based on many different data-driven variables. A useful tool for helping evaluate whether to move forward with or abandon a key business maneuver is calculating a cost-benefit analysis.

Cost-benefit analysis gives an individual or a group of business leaders the power to evaluate a decision or consider a proposal based on an opinion-free, evidence-based evaluation of options to aid data-driven choices and plans.

A CBA involves measurable financial metrics such as revenue earned or costs saved as a result of the decision to pursue a project. It is recommended to perform a CBA during the initial stages and planning process of a project.

Any business leader can perform a cost-benefit analysis, and this responsibility usually falls on analysts and managers to conduct and evaluate. Key stakeholders should participate in and provide input on the specifics involved, especially those individuals impacted by the outcome of the analysis.

Project managers can benefit from conducting or participating in a CBA because it provides an opportunity to weigh and consider the benefits from alternative courses of action instead of continuing to follow the current plan. By considering all options and any potential missed opportunities, the cost-benefit analysis supports better decision-making moving forward.

How to Create a Cost-Benefit Analysis

To calculate the cost-benefit analysis of a project, add up all costs of the project or of a specific decision and subtract that amount from the total projected benefits of the project or decision.

If the estimated benefits outweigh the cost, this is an indication that this could be a good decision to make. If, however, the costs outweigh the benefits, then leadership may want to rethink the project or decision.

For example, if the benefits of a project could be $1 million USD in revenue and the cost to deliver the project is $500,000, then the benefits clearly outweigh the costs in this scenario.

As a project manager, you can create a cost-benefit analysis by working through these simple steps:

• Identify Project Scope: Understand the situation, determine goals, and build a framework for scope.
• List All of the Direct and Indirect Costs and Benefits Associated With the Project: A complete list of costs should include short and long-term costs of labor, inventory, materials, supplies, overhead, services, training, and fees.
• Sum It Up: Add up all of the figures using accurate estimates and historical data to support the best guess at numbers if they are not obvious.
• Evaluate the CBA: the outcomes as a group and consider how the project will affect users and the company.
• Make a Recommendation and Implement: Summarize findings and present the details to management for their review, approval, and final decision to move forward.

The Benefits of Cost-Benefit Analysis in Project Management

Cost-benefit analysis in project management involves measuring and comparing key project management metrics, for both management and financials. ivity, schedule variance, return on investment (ROI), and payback period are just a few of these metrics. The benefits of analyzing cost-benefit for project managers include:

• Gaining stakeholder support
• Receiving approval from informed management
• Obtaining the most accurate estimate of what the project development costs will be
• Easily evaluating and controlling the project’s progress over time

Other benefits to the business include higher revenue, improved customer satisfaction and employee morale, competitive market advantage, and reducing the complexity of business decisions.

Read More: What is Project Management?

Useful Tools for Preparing Cost Benefit Analysis

Diving into the specifics of a cost-benefit analysis can become complicated, depending on the project being evaluated. From simple spreadsheets to robust full-service software tools, there are many options available to help with calculating the details of cash flow; computing a benefit-cost ratio (BCR); and conducting regression modeling, valuation, and forecasting.

A good software solution will allow companies to define standard costs for resources and activities; create project budgets using estimated and standard costs; calculate costs per activity, project, portfolio, or customer; and compare budgets and actual costs per project or portfolio.

Consider one of these cost analysis software tools to help you accurately estimate and support your CBA efforts:

• Oracle Primavera: For projects of any size, this solution integrates project and portfolio planning and delivery teams for planning, resourcing, risk mitigation, scheduling, and program management.
• Harvest: Track time and gain insight from past projects with a tool that integrates with other apps and tools to fit right in with your overall workflow. You can learn more about Harvest in our software review .
• ProjectManager: This simple-to-use yet powerful software solution allows project managers to make data-driven decisions and to manage projects on any level of complexity.

Make Smarter Business Decisions With Cost-Benefit Analysis

Cost-benefit analysis provides the necessary information to make smart business projections and decisions. Project managers often perform and evaluate a CBA, so they are 100% certain their project will be successful.

Cost-benefit analysis establishes proof, which eliminates the need to constantly prove that costs are being minimized to maximize benefits. When conducting a CBA, be thorough with all estimates in order to arrive at the most accurate analysis to support necessary decisions.

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How to Do a Project Management Cost-Benefit Analysis

Before embarking on a journey that is executing a project, you have to know if it’s worth it.

In life, you make a mental list.

As a project manager , you perform a cost-benefit analysis.

In this article, we’re going to show you how to perform and evaluate a cost-benefit analysis so you’re 100% certain that your next project will be successful.

Let’s take a look!

What Is Cost-Benefit Analysis?

According to the official definition , cost-benefit analysis (CBA) is a business process that adds up all the benefits of an initiative (i.e. a project) and then subtracts the associated costs.

So, for example, the benefits of your project could be $1 million in terms of revenue, and your costs could be $500k.

The benefits would outweigh the costs, giving you a firm green go-ahead light

If that’s the case, then your project is financially feasible .

But if you’d earn $1 million in revenue, and your costs would be $2 million, then the initiative wouldn’t be feasible.

The Importance of Cost-Benefit Analysis in Project Management

Who invests in for-profit projects without getting an estimate of their Return on Investment (ROI)?

Very few people.

And as an unbiased method of assessing benefits, costs, and profits, CBA is an excellent way to evaluate the feasibility of your project .

When your project is objectively proven as feasible and profitable, you will:

• Get stakeholder support
• Attain the green light from top management
• Easily evaluate and control your project’s progress.

Conversely, if you don’t run a CBA, you’ll have to talk your stakeholders into working on the project.

After all, they have no proof that the project is going to be successful in the long term.

You’ll have to constantly prove that you’re minimizing costs and maximizing benefits.

It’s a lot of stress. And guesswork isn’t a project management method.

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The Process of Cost-Benefit Analysis in Project Management

Cost-Benefit Analysis dates back to the 18th century when a French engineer and economist by the name of Jules Dupuit decided to evaluate the feasibility of a construction project by taking a look at how much people were willing to pay for it.

The process hasn’t changed much to this day.

We still express the value of projects and initiatives in terms of monetary value . It’s a common unit of measurement.

So let’s start off simple. Your first step is to…

1. List All the Costs and the Benefits of Your Project

Grab a sheet of paper and jot down all the costs and benefits associated with your project.

But before you dig in, keep in mind that there is such a thing as (lost) opportunity cost .

When you choose one option, you’re shouldering the cost of benefits lost by not choosing other options (i.e. opportunities).

For example, by taking the highway (and enjoying the benefits of a faster arrival time), you’re losing the opportunity to take the train (and minimize gas and toll costs).

So when you’re running a cost-benefit analysis for one option, consider other options, as well as their costs and benefits .

Just make sure that all the options are fulfilling the goal you’ve set out to achieve.

The most common benefits are:

• Revenue from sales
• Improved customer satisfaction
• Higher staff morale
• Competitive advantage
• Increased market share.

Again, your benefits don’t have to be fiscal .

But the truth is, you can measure intangible benefits such as improved customer satisfaction with money, as well. If customers are happy, they’ll buy more.


Calculating the costs and benefits of adding Italian food to the menu
 Source: SixSigma

• Common costs include:
• Workforce (the cost of labor)
• Inventory/manufacturing expenses
• Overhead expenses (e.g. electricity)
• Potential risks (e.g. regulatory risks)
• Customer impact
• Lost opportunity costs
• Long-term maintenance costs.

You should consider long-term costs , as well, not just immediate costs.

For example, if you’re evaluating the feasibility of migrating the entire company to new software, you have to factor in the software’s costs in the long term, too.

Perhaps even training, if necessary.

When conducting a CBA, it’s important to be thorough .

One of the most popular techniques for estimating project time and cost is certainly the Work Breakdown Structure (WBS) .

WBS breaks down your project work into manageable bits.

From there, you can calculate the cost of labor, materials, and much more for each task.

After finishing the CBA, you can always reassess certain items without jeopardizing the future of the project.

2. Add Up the Figures.

Once you’ve listed your costs and benefits, it’s time to add it all up.

Finding the right numbers can be hard sometimes, so it’s best to look at market benchmarks and historical data .

However, don’t focus on your historical data too much if it’s old or different.

Always keep both feet on the ground with current market data.

But if you’re using historical data, make sure you convert it to the current value (adjust the past numbers for inflation and current value).

The more accurate your estimates are, the more accurate will your CBA be!

For the simplest equation, simply compare the sum of your costs column to the sum of your benefits column .

If your benefits outweigh the costs, you likely have a winner.

3. Evaluating Your Cost-Benefit Analysis in Project Management

If you want to make sure your cost-benefit analysis is 100% sound, you should also calculate the ROI (Return on Investment):

Total cost/total revenue (benefits) = Length of time (payback period)

Additionally, you can also factor in the discount rate (Will people be more willing to pay for the benefits in the future, and how much?) and Net Present Value (What are the immediate benefits and costs?).

You should also run a sensitivity analysis.

Sensitivity analysis (also called the “What-If Analysis”) considers risks and uncertainties in your projections.

You could also consider worst-case scenarios.

For example, how would your figures change if your sales were only 30% of the sales you predicted in your estimates?

Would that impair the project’s feasibility?

Using Cost-Benefit Analysis in Project Management

Some project managers like evaluating the subjective effects of the project:

• How will the project affect users?
• Will it affect the general public?
• How will the project affect the company?

This is really beneficial if your project has a social connotation to it.

For example, if the project is meant to improve the company’s approach to renewable resources, then it’s worth sacrificing some benefits just to implement it, and generate more value in the long term.

Similarly, if your discount rate analysis shows that the interest for your project’s product will grow in time, then it’s still beneficial – even if the payback period is longer.

Ultimately, it all depends on your company’s strategic goals .

But if your project plans on achieving short or long-term goals while keeping the costs to a minimum, there’s no reason for it not to be successful.

It’s time to ace your CBA!

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Cost-Benefit Analysis for Business Cases (Definition, Steps, Example)

When you prepare a project in line with PMI or other established project management methodologies , you will have to create a project business case. This business case is usually a study on the expected qualitative and financial benefits of a single project or different project options. An essential part of this process is the cost-benefit analysis (sometimes also called benefit-cost analysis).

What Is a Project Business Case?

What is a cost-benefit analysis used for, net present value (npv), benefit-cost ratio (bcr), payback period (pbp / pbp), return on investment (roi), internal rate of return (irr), comparison of approaches – differences between npv vs bcr vs pbp vs roi vs irr, step 1) define the scope and purpose of a cost-benefit analysis, step 2) define the fundamental assumptions, step 3) determine the qualitative advantages and disadvantages of a project or investment option, step 4) develop a forecast of investments, costs and benefits, step 5) choose the methods to assess a project option (e.g. npv, bcr, irr), step 6) calculate the value of the success measures, step 7) consolidate, compare and interpret the results, forecast of cash flows, determination of the discount rate, comparison of npv, bcr, pbp, roi and irr results.

Before a project is initiated, the potential benefits need to be analyzed in a project business case. This document is also the basis for stakeholder decisions and the selection of project options.

The Project Management Institute (PMBOK®, 6 th ed., part 1, p. 30) defines the business case as a ‘documented economic feasibility study’ that outlines the business needs, the current situation, an economic analysis and recommendations. In practice, the structure of business case documents is typically tailored to the requirements and expectations of the stakeholders and the organization. In order to evaluate the economic effects of a project and make different project options comparable, project managers leverage the tools and techniques of the cost-benefit analysis (see next section).

A business case is often accompanied by a benefits management plan (which is also suggested by the PMBOK). This document sets out how the project is going to ensure that the expected benefits will eventually materialize in reality. Both the business case and the benefits management plan are the foundation and input documents of the project charter which is the formal documented authorization and mandate for the initiation of a project.

What Is a Cost-Benefit Analysis?

A cost-benefit analysis is an economic evaluation of investment alternatives and project options with respect to their profitability and liquidity effects. It can also consider non-financial and qualitative aspects which however may or may not be reflected in the forecast of cost and benefits.

Besides forecasting investments, cost and benefits over an individually defined time horizon, a cost-benefit analysis usually involves a number of indicators. These measures aggregate forecasts and assumptions into catchy numbers that can be used for comparison and communication purposes.

Discounting cash flows, determining the amortization time, and calculating return rates are the most common approaches for calculating key performance indicators of a forecast in a cost-benefit analysis. We will cover these approaches in detail in the next section.

There are several reasons for using a cost-benefit analysis. The most obvious one is to determine the expected financial returns and profitability of an investment or a project. Subsequently, different options can be compared with each other based on cost-benefit analyses. This can be the basis for decision-making and the selection of the alternative or option to go for (source). This is a typical step before project initiation and often part of a project business case.

The initial cost-benefit analysis results also serve as a baseline for the measurement of success in an ongoing project. Thus, they help project managers, sponsors and other stakeholders to measure, monitor and manage the value a project is creating against the original expectation.

Although the cost-benefit analysis is not an original risk management technique, its results can be used to assess and consider certain risks of a project. An example is a benefit-cost ratio greater than 1: the closer it gets to 1, the higher the risk that even small deviations from the forecasted benefits lead to a loss-producing project.

On the other side, discounted cash flow-based approaches can be calculated using a risk-adjusted discount rate. This allows taking inherent risk into account when net present values or benefit-cost ratios are calculated.

What Are Common Tools and Techniques of a Cost-Benefit Analysis?

An inevitable part of a project business case and a cost-benefit analysis are certain success measures. While the set of indicators needs to be in line with the organization’s requirements, there are in fact a number of very common indicators that are introduced below.  Although the following list is not exhaustive, it covers the generic types of the most common success measures, namely:

• Net present value (NPV),
• Benefit-cost ratio (BCR),
• Payback period (PBP or PbP),
• Return on investment (ROI),
• Internal rate of return (IRR).

These success measures allow project managers to conduct a balanced cost-benefit analysis that covers different aspects such as profitability, liquidity and riskiness of project options. At the same time, these indicators are comparatively simple to calculate and easy to understand in the course of stakeholder communication .

The NPV represents the present value of a series of cash flows. The calculation involves the discounting of net cash flows with a discount rate. This rate is part of the set of assumptions required for applying the net present value method.

The underlying series of cash flows begins with the initial investment as an outflow, followed by net cash flows for each period of the time horizon of the forecast. Future cash flows and a remaining value (or salvage value), as well as disposal costs or further returns expected in subsequent periods, are reflected in a residual value.

Read more in our article on the net present value and use our NPV calculator to determine the value of your project options and investment alternatives.

What Is the Net Present Value (NPV) & How Is It Calculated?

Net Present Value (NPV) Calculator

The benefit-cost ratio compares the present values of all benefits with the present value of all costs expected in a project or investment. A value greater than 1 indicates a profitable project with a total return exceeding the discount rate. A value of less than 1 suggests that the forecasted series of cash flows is not a profitable option.

Read more in our article on the benefit-cost ratio and use our BCR calculator to determine the value of your project options and investment alternatives.

What Is the Benefit Cost Ratio (BCR)? Definition, Formula, Example.

Benefit Cost Ratio (BCR) Calculator

The payback period determines the period in which the cumulative cash flows of a project turn positive for the first time. At that point, the initial investment has been ‘paid back’.

The series of cash flows usually starts with an investment (an outflow, hence a negative number), followed by positive and/or negative net cash flows. These can be even, i.e. the net cash flow remains constant for the entire forecast horizon, or uneven with different values among the periods of a forecast.

When determining the payback period, the generic approach does not use any discount rates or other adjustments which may be inaccurate for long-term forecasts. However, there are a number of modified PbP approaches that can be used to resolve this disadvantage.

Read more in our article on the payback period and use our PbP calculator to determine the value of your project options and investment alternatives.

Payback Period Calculator – PbP for Even & Uneven Cash Flows

The basic formula of the ROI is a division of expected constant returns by the investment amount. It is usually calculated for only one period. However, there are several variants of the return on investment method, including a cumulative and annualized ROI (for multiple periods).

Return on Investment (Single & Multi-Period ROI): Formulae, Examples, Calculator

The internal rate of return is determined by using a net present value calculation. The IRR is the discount rate that would lead to an NPV of 0 if applied to the individual forecast. The resulting rate is the fictive interest or return rate of an investment.

Internal Rate of Return (IRR) vs. ROI – What Are the Differences?

IRR Calculator: Internal Rate of Return (IRR) of Projects

How to Do a Cost-Benefit Analysis in 7 Steps

Follow these 7 steps to prepare a cost-benefit analysis. You will need some input data, as set out in the individual steps, a calculator and a fundamental understanding of the aforementioned indicators. You can download this checklist which will help you gather the required information and data.

The following steps refer to both the qualitative and the financial aspects of a cost-benefit analysis.

First things first: before you start assessing different project options or investment alternatives, make sure that you develop and agree on a clear definition of the scope and purpose of the analysis.

The scope describes what exactly you are going to evaluate. This may refer to high-level project options, single investments or other types of endeavors that are selected for the analysis. For a proper cost-benefit analysis, it should be clear which components are expected to be included (e.g. indirect / internal costs and benefits) and which are not (e.g. direct or indirect taxes).

Determining the purpose of the analysis relates to the expected result type. It clarifies whether solely economic aspects are to be considered, or whether qualitative criteria are also relevant and part of this analysis. A project manager should also be aware of whether profitability, liquidity or risk is the organization’s most relevant consideration.

Examples of cost-benefit analyses that may not solely focus on economic criteria are non-profit projects or social projects run by governments or NGOs.

Before you start, make sure that the basic assumptions of the analysis are known and will be considered in subsequent steps. Assumptions may range from implementation scenarios, headcount, resource needs, etc. to agreed expectations regarding the discount rate and the organization’s target profitability.

Make sure that you are incorporating and addressing all the criteria deemed important by the organization. If you compare different project options, it is crucial that the assumptions are used consistently among all the alternatives you are comparing.

If different or even contradicting types of assumptions are requested, you should consider assessing them separately and in different scenarios.

Gather and document the pros and cons of each and every option you are assessing. Group them into categories and compare them among each other, e.g. in a structure similar to our table in the previous section.

Depending on the type of project, you may wish to consider converting qualitative aspects into financial benefits or cash flow equivalents. This could be done for qualitative advantages that are indirectly affecting financial cash flows. Examples are increasing process efficiency, customer satisfaction and engagement as well as improved quality of products and services.

This may however not be working for other types of advantages and disadvantages. For instance, social and ecological considerations ( source ) as well as long-time effects such as brand image may not be convertible into cash flows of a mid-term forecast.

Come up with a forecast of future benefits and costs (or cash inflows and outflows), investment amounts and other financial considerations.

Depending on the complexity of the options that you are analyzing, you may want to involve subject matter experts to create or validate estimates.

This step usually requires a number of assumptions on a granular level. You should therefore develop an understanding of the uncertainty inherent in this forecast. If you are in doubt, you better create different scenarios (e.g. a base and a worst case) to reflect situations where things turn out differently than expected.

A cost benefit analysis can be performed with different tools and techniques. Net present value, benefit-cost ratio , payback period, return on investment and internal rate of return are the most common methods to assess economic effects from projects, investments and initiatives. Refer to the above-mentioned introduction and read the detailed articles on these measures. Eventually, you will come up with a set of indicators that is suitable for the individual situation.

If you have selected the indicators, you need to apply them to the forecasts that you have developed in a previous step. You will find the formulas in the detailed articles on those methods . When calculating the success measures, apply every method in a consistent manner to all options. This will ensure the comparability and thus the integrity of the results.

As a last step, consolidate all the aspects and results that you have produced in the course of the analysis. You can do this by creating a table that contains the calculated values, the qualitative pros and cons and a ranking of each of the options.

If you are working in scenarios, you will probably want to breakdown each option into the different scenarios (e.g. best, middle, worst case) that you have used previously.

At the completion of the cost-benefit analysis, you should have a clear view on the economic and qualitative aspects of the alternatives you are comparing. Ideally, you are able to recommend a certain option or discard others at this point.

Example: Assessing Project Options with NPV, BCR and PbP

In this illustrative example, we will compare 3 different project options for the implementation of a new IT system with each other. For illustrative purposes, the analysis focuses on the economic aspects only, not taking qualitative and strategic considerations into account.

In order to perform the cost-benefit analysis with all three options, the project manager has obtained estimates of the investments , running and maintenance costs and expected benefits. The benefits consist of both savings from more efficient processes and increased revenue given that the new software improves the way customers are served. The following table shows the consolidated forecast of the three alternatives.

One could be tempted to simply calculate the sum of the cash flows. However, this is not an accurate approach to deal with cash flows occurring at different points in time. We will nevertheless use the simple sum in the result table for comparison purposes.

If one of the more accurate approaches such as NPV and BCR are used, a discount rate is necessary to perform the calculation. This discount rate can be a market interest rate which may be risk- or time-adjusted. In organizations and projects, more common alternatives are either the company’s target return rate or the cost of capital. In this example, the organization expects a return of 12% on all investments which will be used as a discount rate accordingly.

The following table compares the results of the different methods applied to this example. Refer to the dedicated articles on each of these indicators for the respective illustrated step-by-step calculation.

Based on the economic cost-benefit analysis, Option 3 seems to be the most promising one in all measures except ROI. Although the simple sum of its net cash flows is the lowest in this comparison, it creates the highest net present value and the highest internal rate of return. This is because the period when expenses and benefits occur is considered in the NPV. It also comes with the highest benefit-cost ratio. Thus, there is a certain buffer if the benefits do not materialize in the way it was initially expected. With a payback period of 4.71, this option achieves a full amortization in less than 5 years which can be a reasonable time horizon for many organizations.

Option 2 which has the highest sum of non-discounted cash flows does in fact not even yield the required return rate of 12%. As this rate has been used as a discount rate, both the BCR and the NPV indicate a non-profitable investment.

Note that the ROI, as well as the annualized ROI, are not accurate for these examples. Refer to the detailed ROI calculation for further explanations. We have not included the Disconted Payback Period (DPP) as it is not mentioned in the PMBOK. You can find the DPP for the above case study in this article though.

This example refers to the economic aspects of a cost-benefit analysis. In practice, you would want to consider and analyze the qualitative pros and cons as well.

A proper project business case usually requires a financial cost-benefit analysis. While there are a number of calculation methods that help compare and evaluate different project options, you should be aware of the risks and weaknesses ( source ).

Financial models and indicators are always an abstraction of the reality and forecasts may or may not be met in reality. Therefore, all the methods introduced above rely on assumptions. In some cases, it may even be only one single figure turning it into a loss-producing or profitable option (e.g. a perpetuity in the NPV).

So, make sure you understand these dependencies, work with different scenarios if sensible and maintain a comprehensive and honest communication with the stakeholders. Read our detailed articles on cost-benefit analysis methods to learn more about these methods and use this checklist when doing a cost-benefit analysis.

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Learn from the business planning experts, resources to help you get ahead, core cost analysis, table of contents.

Core Cost Analysis is an essential process in the early stages of business planning, where entrepreneurs conduct a thorough examination of all costs associated with delivering the fundamental customer experience of a business idea.

A Core Cost Analysis is more comprehensive than just looking at the cost of goods sold (COGS); it involves evaluating every aspect that contributes to the overall customer experience, from production to service delivery.

n addition to the direct costs of producing a product or service, Core Cost Analysis looks at indirect costs like ambiance, customer service quality, and other factors contributing to the customer experience, especially important for service-oriented businesses. It helps entrepreneurs determine if their business idea is financially feasible, considering both direct and indirect costs.

The analysis provides critical data for making informed decisions about pricing, budgeting, and overall business strategy.By understanding the comprehensive cost structure, entrepreneurs can refine their business models to provide a unique value proposition.

In the Pre-Planning Planning Process

Core Cost Analysis is particularly crucial in the pre-planning phase of a business. It acts as a reality check, providing entrepreneurs with a detailed forecast of the expenses involved in realizing and sustaining their business concept.

Frequently Asked Questions

• How does Core Cost Analysis differ from regular cost analysis?

Core Cost Analysis is more comprehensive than standard cost analysis. While regular cost analysis may focus primarily on direct costs associated with producing a product or service, Core Cost Analysis includes a detailed assessment of all elements that contribute to the customer experience, including indirect and often overlooked expenses.

• Why is Core Cost Analysis particularly important for service-oriented businesses?

In service-oriented businesses like restaurants or hospitality, the customer experience extends beyond the core service. Elements like ambiance, staff quality, and even tableware play a significant role in customer satisfaction. Core Cost Analysis ensures that all these contributing factors are financially feasible and aligned with the business’s goals.

• How can entrepreneurs effectively conduct Core Cost Analysis?

To effectively conduct Core Cost Analysis, entrepreneurs should:

• Break down their business concept into individual elements that contribute to the customer experience.
• Assign costs to each of these elements, considering both direct and indirect expenses.
• Analyze these costs in the context of market expectations, competitive pricing, and potential revenue streams.
• Seek advice from financial experts or use cost analysis tools for accurate and comprehensive evaluations.

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How to create a business plan: examples & free template.

This is the ultimate guide to creating a comprehensive and effective plan to start a business . In today’s dynamic business landscape, having a well-crafted business plan is an important first step to securing funding, attracting partners, and navigating the challenges of entrepreneurship.

This guide has been designed to help you create a winning plan that stands out in the ever-evolving marketplace. U sing real-world examples and a free downloadable template, it will walk you through each step of the process.

Whether you’re a seasoned entrepreneur or launching your very first startup, the guide will give you the insights, tools, and confidence you need to create a solid foundation for your business.

Table of Contents

How to Write a Business Plan

Embarking on the journey of creating a successful business requires a solid foundation, and a well-crafted business plan is the cornerstone. Here is the process of writing a comprehensive business plan and the main parts of a winning business plan . From setting objectives to conducting market research, this guide will have everything you need.

Executive Summary

The Executive Summary serves as the gateway to your business plan, offering a snapshot of your venture’s core aspects. This section should captivate and inform, succinctly summarizing the essence of your plan.

It’s crucial to include a clear mission statement, a brief description of your primary products or services, an overview of your target market, and key financial projections or achievements.

Think of it as an elevator pitch in written form: it should be compelling enough to engage potential investors or stakeholders and provide them with a clear understanding of what your business is about, its goals, and why it’s a promising investment.

Example: EcoTech is a technology company specializing in eco-friendly and sustainable products designed to reduce energy consumption and minimize waste. Our mission is to create innovative solutions that contribute to a cleaner, greener environment.

Our target market includes environmentally conscious consumers and businesses seeking to reduce their carbon footprint. We project a 200% increase in revenue within the first three years of operation.

Overview and Business Objectives

In the Overview and Business Objectives section, outline your business’s core goals and the strategic approaches you plan to use to achieve them. This section should set forth clear, specific objectives that are attainable and time-bound, providing a roadmap for your business’s growth and success.

It’s important to detail how these objectives align with your company’s overall mission and vision. Discuss the milestones you aim to achieve and the timeframe you’ve set for these accomplishments.

This part of the plan demonstrates to investors and stakeholders your vision for growth and the practical steps you’ll take to get there.

Example: EcoTech’s primary objective is to become a market leader in sustainable technology products within the next five years. Our key objectives include:

• Introducing three new products within the first two years of operation.
• Achieving annual revenue growth of 30%.
• Expanding our customer base to over 10,000 clients by the end of the third year.

Company Description

The Company Description section is your opportunity to delve into the details of your business. Provide a comprehensive overview that includes your company’s history, its mission statement, and its vision for the future.

Highlight your unique selling proposition (USP) – what makes your business stand out in the market. Explain the problems your company solves and how it benefits your customers.

Include information about the company’s founders, their expertise, and why they are suited to lead the business to success. This section should paint a vivid picture of your business, its values, and its place in the industry.

Example: EcoTech is committed to developing cutting-edge sustainable technology products that benefit both the environment and our customers. Our unique combination of innovative solutions and eco-friendly design sets us apart from the competition. We envision a future where technology and sustainability go hand in hand, leading to a greener planet.

Define Your Target Market

Defining Your Target Market is critical for tailoring your business strategy effectively. This section should describe your ideal customer base in detail, including demographic information (such as age, gender, income level, and location) and psychographic data (like interests, values, and lifestyle).

Elucidate on the specific needs or pain points of your target audience and how your product or service addresses these. This information will help you know your target market and develop targeted marketing strategies.

Example: Our target market comprises environmentally conscious consumers and businesses looking for innovative solutions to reduce their carbon footprint. Our ideal customers are those who prioritize sustainability and are willing to invest in eco-friendly products.

Market Analysis

The Market Analysis section requires thorough research and a keen understanding of the industry. It involves examining the current trends within your industry, understanding the needs and preferences of your customers, and analyzing the strengths and weaknesses of your competitors.

This analysis will enable you to spot market opportunities and anticipate potential challenges. Include data and statistics to back up your claims, and use graphs or charts to illustrate market trends.

This section should demonstrate that you have a deep understanding of the market in which you operate and that your business is well-positioned to capitalize on its opportunities.

Example: The market for eco-friendly technology products has experienced significant growth in recent years, with an estimated annual growth rate of 10%. As consumers become increasingly aware of environmental issues, the demand for sustainable solutions continues to rise.

Our research indicates a gap in the market for high-quality, innovative eco-friendly technology products that cater to both individual and business clients.

SWOT Analysis

A SWOT analysis in your business plan offers a comprehensive examination of your company’s internal and external factors. By assessing Strengths, you showcase what your business does best and where your capabilities lie.

Weaknesses involve an honest introspection of areas where your business may be lacking or could improve. Opportunities can be external factors that your business could capitalize on, such as market gaps or emerging trends.

Threats include external challenges your business may face, like competition or market changes. This analysis is crucial for strategic planning, as it helps in recognizing and leveraging your strengths, addressing weaknesses, seizing opportunities, and preparing for potential threats.

Including a SWOT analysis demonstrates to stakeholders that you have a balanced and realistic understanding of your business in its operational context.

• Innovative and eco-friendly product offerings.
• Strong commitment to sustainability and environmental responsibility.
• Skilled and experienced team with expertise in technology and sustainability.

Weaknesses:

• Limited brand recognition compared to established competitors.
• Reliance on third-party manufacturers for product development.

Opportunities:

• Growing consumer interest in sustainable products.
• Partnerships with environmentally-focused organizations and influencers.
• Expansion into international markets.
• Intense competition from established technology companies.
• Regulatory changes could impact the sustainable technology market.

Competitive Analysis

In this section, you’ll analyze your competitors in-depth, examining their products, services, market positioning, and pricing strategies. Understanding your competition allows you to identify gaps in the market and tailor your offerings to outperform them.

By conducting a thorough competitive analysis, you can gain insights into your competitors’ strengths and weaknesses, enabling you to develop strategies to differentiate your business and gain a competitive advantage in the marketplace.

Example: Key competitors include:

GreenTech: A well-known brand offering eco-friendly technology products, but with a narrower focus on energy-saving devices.

EarthSolutions: A direct competitor specializing in sustainable technology, but with a limited product range and higher prices.

By offering a diverse product portfolio, competitive pricing, and continuous innovation, we believe we can capture a significant share of the growing sustainable technology market.

Organization and Management Team

Provide an overview of your company’s organizational structure, including key roles and responsibilities. Introduce your management team, highlighting their expertise and experience to demonstrate that your team is capable of executing the business plan successfully.

Showcasing your team’s background, skills, and accomplishments instills confidence in investors and other stakeholders, proving that your business has the leadership and talent necessary to achieve its objectives and manage growth effectively.

Example: EcoTech’s organizational structure comprises the following key roles: CEO, CTO, CFO, Sales Director, Marketing Director, and R&D Manager. Our management team has extensive experience in technology, sustainability, and business development, ensuring that we are well-equipped to execute our business plan successfully.

Products and Services Offered

Describe the products or services your business offers, focusing on their unique features and benefits. Explain how your offerings solve customer pain points and why they will choose your products or services over the competition.

This section should emphasize the value you provide to customers, demonstrating that your business has a deep understanding of customer needs and is well-positioned to deliver innovative solutions that address those needs and set your company apart from competitors.

Example: EcoTech offers a range of eco-friendly technology products, including energy-efficient lighting solutions, solar chargers, and smart home devices that optimize energy usage. Our products are designed to help customers reduce energy consumption, minimize waste, and contribute to a cleaner environment.

Marketing and Sales Strategy

In this section, articulate your comprehensive strategy for reaching your target market and driving sales. Detail the specific marketing channels you plan to use, such as social media, email marketing, SEO, or traditional advertising.

Describe the nature of your advertising campaigns and promotional activities, explaining how they will capture the attention of your target audience and convey the value of your products or services. Outline your sales strategy, including your sales process, team structure, and sales targets.

Discuss how these marketing and sales efforts will work together to attract and retain customers, generate leads, and ultimately contribute to achieving your business’s revenue goals.

This section is critical to convey to investors and stakeholders that you have a well-thought-out approach to market your business effectively and drive sales growth.

Example: Our marketing strategy includes digital advertising, content marketing, social media promotion, and influencer partnerships. We will also attend trade shows and conferences to showcase our products and connect with potential clients. Our sales strategy involves both direct sales and partnerships with retail stores, as well as online sales through our website and e-commerce platforms.

Logistics and Operations Plan

The Logistics and Operations Plan is a critical component that outlines the inner workings of your business. It encompasses the management of your supply chain, detailing how you acquire raw materials and manage vendor relationships.

Inventory control is another crucial aspect, where you explain strategies for inventory management to ensure efficiency and reduce wastage. The section should also describe your production processes, emphasizing scalability and adaptability to meet changing market demands.

Quality control measures are essential to maintain product standards and customer satisfaction. This plan assures investors and stakeholders of your operational competency and readiness to meet business demands.

Highlighting your commitment to operational efficiency and customer satisfaction underlines your business’s capability to maintain smooth, effective operations even as it scales.

Example: EcoTech partners with reliable third-party manufacturers to produce our eco-friendly technology products. Our operations involve maintaining strong relationships with suppliers, ensuring quality control, and managing inventory.

We also prioritize efficient distribution through various channels, including online platforms and retail partners, to deliver products to our customers in a timely manner.

Financial Projections Plan

In the Financial Projections Plan, lay out a clear and realistic financial future for your business. This should include detailed projections for revenue, costs, and profitability over the next three to five years.

Ground these projections in solid assumptions based on your market analysis, industry benchmarks, and realistic growth scenarios. Break down revenue streams and include an analysis of the cost of goods sold, operating expenses, and potential investments.

This section should also discuss your break-even analysis, cash flow projections, and any assumptions about external funding requirements.

By presenting a thorough and data-backed financial forecast, you instill confidence in potential investors and lenders, showcasing your business’s potential for profitability and financial stability.

This forward-looking financial plan is crucial for demonstrating that you have a firm grasp of the financial nuances of your business and are prepared to manage its financial health effectively.

Example: Over the next three years, we expect to see significant growth in revenue, driven by new product launches and market expansion. Our financial projections include:

• Year 1: $1.5 million in revenue, with a net profit of $200,000.
• Year 2: $3 million in revenue, with a net profit of $500,000.
• Year 3: $4.5 million in revenue, with a net profit of $1 million.

These projections are based on realistic market analysis, growth rates, and product pricing.

Income Statement

The income statement , also known as the profit and loss statement, provides a summary of your company’s revenues and expenses over a specified period. It helps you track your business’s financial performance and identify trends, ensuring you stay on track to achieve your financial goals.

Regularly reviewing and analyzing your income statement allows you to monitor the health of your business, evaluate the effectiveness of your strategies, and make data-driven decisions to optimize profitability and growth.

Example: The income statement for EcoTech’s first year of operation is as follows:

• Revenue: $1,500,000
• Cost of Goods Sold: $800,000
• Gross Profit: $700,000
• Operating Expenses: $450,000
• Net Income: $250,000

This statement highlights our company’s profitability and overall financial health during the first year of operation.

Cash Flow Statement

A cash flow statement is a crucial part of a financial business plan that shows the inflows and outflows of cash within your business. It helps you monitor your company’s liquidity, ensuring you have enough cash on hand to cover operating expenses, pay debts, and invest in growth opportunities.

By including a cash flow statement in your business plan, you demonstrate your ability to manage your company’s finances effectively.

Example:  The cash flow statement for EcoTech’s first year of operation is as follows:

Operating Activities:

• Depreciation: $10,000
• Changes in Working Capital: -$50,000
• Net Cash from Operating Activities: $210,000

Investing Activities:

•  Capital Expenditures: -$100,000
• Net Cash from Investing Activities: -$100,000

Financing Activities:

• Proceeds from Loans: $150,000
• Loan Repayments: -$50,000
• Net Cash from Financing Activities: $100,000
• Net Increase in Cash: $210,000

This statement demonstrates EcoTech’s ability to generate positive cash flow from operations, maintain sufficient liquidity, and invest in growth opportunities.

Tips on Writing a Business Plan

1. Be clear and concise: Keep your language simple and straightforward. Avoid jargon and overly technical terms. A clear and concise business plan is easier for investors and stakeholders to understand and demonstrates your ability to communicate effectively.

2. Conduct thorough research: Before writing your business plan, gather as much information as possible about your industry, competitors, and target market. Use reliable sources and industry reports to inform your analysis and make data-driven decisions.

3. Set realistic goals: Your business plan should outline achievable objectives that are specific, measurable, attainable, relevant, and time-bound (SMART). Setting realistic goals demonstrates your understanding of the market and increases the likelihood of success.

4. Focus on your unique selling proposition (USP): Clearly articulate what sets your business apart from the competition. Emphasize your USP throughout your business plan to showcase your company’s value and potential for success.

5. Be flexible and adaptable: A business plan is a living document that should evolve as your business grows and changes. Be prepared to update and revise your plan as you gather new information and learn from your experiences.

6. Use visuals to enhance understanding: Include charts, graphs, and other visuals to help convey complex data and ideas. Visuals can make your business plan more engaging and easier to digest, especially for those who prefer visual learning.

7. Seek feedback from trusted sources: Share your business plan with mentors, industry experts, or colleagues and ask for their feedback. Their insights can help you identify areas for improvement and strengthen your plan before presenting it to potential investors or partners.

FREE Business Plan Template

To help you get started on your business plan, we have created a template that includes all the essential components discussed in the “How to Write a Business Plan” section. This easy-to-use template will guide you through each step of the process, ensuring you don’t miss any critical details.

The template is divided into the following sections:

• Mission statement
• Business Overview
• Key products or services
• Target market
• Financial highlights
• Company goals
• Strategies to achieve goals
• Measurable, time-bound objectives
• Company History
• Mission and vision
• Unique selling proposition
• Demographics
• Psychographics
• Pain points
• Industry trends
• Customer needs
• Competitor strengths and weaknesses
• Opportunities
• Competitor products and services
• Market positioning
• Pricing strategies
• Organizational structure
• Key roles and responsibilities
• Management team backgrounds
• Product or service features
• Competitive advantages
• Marketing channels
• Advertising campaigns
• Promotional activities
• Sales strategies
• Supply chain management
• Inventory control
• Production processes
• Quality control measures
• Projected revenue
• Assumptions
• Cash inflows
• Cash outflows
• Net cash flow

What is a Business Plan?

A business plan is a strategic document that outlines an organization’s goals, objectives, and the steps required to achieve them. It serves as a roadmap as you start a business , guiding the company’s direction and growth while identifying potential obstacles and opportunities.

Typically, a business plan covers areas such as market analysis, financial projections, marketing strategies, and organizational structure. It not only helps in securing funding from investors and lenders but also provides clarity and focus to the management team.

A well-crafted business plan is a very important part of your business startup checklist because it fosters informed decision-making and long-term success.

Why You Should Write a Business Plan

Understanding the importance of a business plan in today’s competitive environment is crucial for entrepreneurs and business owners. Here are five compelling reasons to write a business plan:

• Attract Investors and Secure Funding : A well-written business plan demonstrates your venture’s potential and profitability, making it easier to attract investors and secure the necessary funding for growth and development. It provides a detailed overview of your business model, target market, financial projections, and growth strategies, instilling confidence in potential investors and lenders that your company is a worthy investment.
• Clarify Business Objectives and Strategies : Crafting a business plan forces you to think critically about your goals and the strategies you’ll employ to achieve them, providing a clear roadmap for success. This process helps you refine your vision and prioritize the most critical objectives, ensuring that your efforts are focused on achieving the desired results.
• Identify Potential Risks and Opportunities : Analyzing the market, competition, and industry trends within your business plan helps identify potential risks and uncover untapped opportunities for growth and expansion. This insight enables you to develop proactive strategies to mitigate risks and capitalize on opportunities, positioning your business for long-term success.
• Improve Decision-Making : A business plan serves as a reference point so you can make informed decisions that align with your company’s overall objectives and long-term vision. By consistently referring to your plan and adjusting it as needed, you can ensure that your business remains on track and adapts to changes in the market, industry, or internal operations.
• Foster Team Alignment and Communication : A shared business plan helps ensure that all team members are on the same page, promoting clear communication, collaboration, and a unified approach to achieving the company’s goals. By involving your team in the planning process and regularly reviewing the plan together, you can foster a sense of ownership, commitment, and accountability that drives success.

What are the Different Types of Business Plans?

In today’s fast-paced business world, having a well-structured roadmap is more important than ever. A traditional business plan provides a comprehensive overview of your company’s goals and strategies, helping you make informed decisions and achieve long-term success. There are various types of business plans, each designed to suit different needs and purposes. Let’s explore the main types:

• Startup Business Plan: Tailored for new ventures, a startup business plan outlines the company’s mission, objectives, target market, competition, marketing strategies, and financial projections. It helps entrepreneurs clarify their vision, secure funding from investors, and create a roadmap for their business’s future. Additionally, this plan identifies potential challenges and opportunities, which are crucial for making informed decisions and adapting to changing market conditions.
• Internal Business Plan: This type of plan is intended for internal use, focusing on strategies, milestones, deadlines, and resource allocation. It serves as a management tool for guiding the company’s growth, evaluating its progress, and ensuring that all departments are aligned with the overall vision. The internal business plan also helps identify areas of improvement, fosters collaboration among team members, and provides a reference point for measuring performance.
• Strategic Business Plan: A strategic business plan outlines long-term goals and the steps to achieve them, providing a clear roadmap for the company’s direction. It typically includes a SWOT analysis, market research, and competitive analysis. This plan allows businesses to align their resources with their objectives, anticipate changes in the market, and develop contingency plans. By focusing on the big picture, a strategic business plan fosters long-term success and stability.
• Feasibility Business Plan: This plan is designed to assess the viability of a business idea, examining factors such as market demand, competition, and financial projections. It is often used to decide whether or not to pursue a particular venture. By conducting a thorough feasibility analysis, entrepreneurs can avoid investing time and resources into an unviable business concept. This plan also helps refine the business idea, identify potential obstacles, and determine the necessary resources for success.
• Growth Business Plan: Also known as an expansion plan, a growth business plan focuses on strategies for scaling up an existing business. It includes market analysis, new product or service offerings, and financial projections to support expansion plans. This type of plan is essential for businesses looking to enter new markets, increase their customer base, or launch new products or services. By outlining clear growth strategies, the plan helps ensure that expansion efforts are well-coordinated and sustainable.
• Operational Business Plan: This type of plan outlines the company’s day-to-day operations, detailing the processes, procedures, and organizational structure. It is an essential tool for managing resources, streamlining workflows, and ensuring smooth operations. The operational business plan also helps identify inefficiencies, implement best practices, and establish a strong foundation for future growth. By providing a clear understanding of daily operations, this plan enables businesses to optimize their resources and enhance productivity.
• Lean Business Plan: A lean business plan is a simplified, agile version of a traditional plan, focusing on key elements such as value proposition, customer segments, revenue streams, and cost structure. It is perfect for startups looking for a flexible, adaptable planning approach. The lean business plan allows for rapid iteration and continuous improvement, enabling businesses to pivot and adapt to changing market conditions. This streamlined approach is particularly beneficial for businesses in fast-paced or uncertain industries.
• One-Page Business Plan: As the name suggests, a one-page business plan is a concise summary of your company’s key objectives, strategies, and milestones. It serves as a quick reference guide and is ideal for pitching to potential investors or partners. This plan helps keep teams focused on essential goals and priorities, fosters clear communication, and provides a snapshot of the company’s progress. While not as comprehensive as other plans, a one-page business plan is an effective tool for maintaining clarity and direction.
• Nonprofit Business Plan: Specifically designed for nonprofit organizations, this plan outlines the mission, goals, target audience, fundraising strategies, and budget allocation. It helps secure grants and donations while ensuring the organization stays on track with its objectives. The nonprofit business plan also helps attract volunteers, board members, and community support. By demonstrating the organization’s impact and plans for the future, this plan is essential for maintaining transparency, accountability, and long-term sustainability within the nonprofit sector.
• Franchise Business Plan: For entrepreneurs seeking to open a franchise, this type of plan focuses on the franchisor’s requirements, as well as the franchisee’s goals, strategies, and financial projections. It is crucial for securing a franchise agreement and ensuring the business’s success within the franchise system. This plan outlines the franchisee’s commitment to brand standards, marketing efforts, and operational procedures, while also addressing local market conditions and opportunities. By creating a solid franchise business plan, entrepreneurs can demonstrate their ability to effectively manage and grow their franchise, increasing the likelihood of a successful partnership with the franchisor.

Using Business Plan Software

Creating a comprehensive business plan can be intimidating, but business plan software can streamline the process and help you produce a professional document. These tools offer a number of benefits, including guided step-by-step instructions, financial projections, and industry-specific templates. Here are the top 5 business plan software options available to help you craft a great business plan.

1. LivePlan

LivePlan is a popular choice for its user-friendly interface and comprehensive features. It offers over 500 sample plans, financial forecasting tools, and the ability to track your progress against key performance indicators. With LivePlan, you can create visually appealing, professional business plans that will impress investors and stakeholders.

2. Upmetrics

Upmetrics provides a simple and intuitive platform for creating a well-structured business plan. It features customizable templates, financial forecasting tools, and collaboration capabilities, allowing you to work with team members and advisors. Upmetrics also offers a library of resources to guide you through the business planning process.

Bizplan is designed to simplify the business planning process with a drag-and-drop builder and modular sections. It offers financial forecasting tools, progress tracking, and a visually appealing interface. With Bizplan, you can create a business plan that is both easy to understand and visually engaging.

Enloop is a robust business plan software that automatically generates a tailored plan based on your inputs. It provides industry-specific templates, financial forecasting, and a unique performance score that updates as you make changes to your plan. Enloop also offers a free version, making it accessible for businesses on a budget.

5. Tarkenton GoSmallBiz

Developed by NFL Hall of Famer Fran Tarkenton, GoSmallBiz is tailored for small businesses and startups. It features a guided business plan builder, customizable templates, and financial projection tools. GoSmallBiz also offers additional resources, such as CRM tools and legal document templates, to support your business beyond the planning stage.

Business Plan FAQs

What is a good business plan.

A good business plan is a well-researched, clear, and concise document that outlines a company’s goals, strategies, target market, competitive advantages, and financial projections. It should be adaptable to change and provide a roadmap for achieving success.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are to guide the company’s strategy, attract investment, and evaluate performance against objectives. Here’s a closer look at each of these:

• It outlines the company’s purpose and core values to ensure that all activities align with its mission and vision.
• It provides an in-depth analysis of the market, including trends, customer needs, and competition, helping the company tailor its products and services to meet market demands.
• It defines the company’s marketing and sales strategies, guiding how the company will attract and retain customers.
• It describes the company’s organizational structure and management team, outlining roles and responsibilities to ensure effective operation and leadership.
• It sets measurable, time-bound objectives, allowing the company to plan its activities effectively and make strategic decisions to achieve these goals.
• It provides a comprehensive overview of the company and its business model, demonstrating its uniqueness and potential for success.
• It presents the company’s financial projections, showing its potential for profitability and return on investment.
• It demonstrates the company’s understanding of the market, including its target customers and competition, convincing investors that the company is capable of gaining a significant market share.
• It showcases the management team’s expertise and experience, instilling confidence in investors that the team is capable of executing the business plan successfully.
• It establishes clear, measurable objectives that serve as performance benchmarks.
• It provides a basis for regular performance reviews, allowing the company to monitor its progress and identify areas for improvement.
• It enables the company to assess the effectiveness of its strategies and make adjustments as needed to achieve its objectives.
• It helps the company identify potential risks and challenges, enabling it to develop contingency plans and manage risks effectively.
• It provides a mechanism for evaluating the company’s financial performance, including revenue, expenses, profitability, and cash flow.

Can I write a business plan by myself?

Yes, you can write a business plan by yourself, but it can be helpful to consult with mentors, colleagues, or industry experts to gather feedback and insights. There are also many creative business plan templates and business plan examples available online, including those above.

We also have examples for specific industries, including a using food truck business plan , salon business plan , farm business plan , daycare business plan , and restaurant business plan .

Is it possible to create a one-page business plan?

Yes, a one-page business plan is a condensed version that highlights the most essential elements, including the company’s mission, target market, unique selling proposition, and financial goals.

How long should a business plan be?

A typical business plan ranges from 20 to 50 pages, but the length may vary depending on the complexity and needs of the business.

What is a business plan outline?

A business plan outline is a structured framework that organizes the content of a business plan into sections, such as the executive summary, company description, market analysis, and financial projections.

What are the 5 most common business plan mistakes?

The five most common business plan mistakes include inadequate research, unrealistic financial projections, lack of focus on the unique selling proposition, poor organization and structure, and failure to update the plan as circumstances change.

What questions should be asked in a business plan?

A business plan should address questions such as: What problem does the business solve? Who is the specific target market ? What is the unique selling proposition? What are the company’s objectives? How will it achieve those objectives?

What’s the difference between a business plan and a strategic plan?

A business plan focuses on the overall vision, goals, and tactics of a company, while a strategic plan outlines the specific strategies, action steps, and performance measures necessary to achieve the company’s objectives.

How is business planning for a nonprofit different?

Nonprofit business planning focuses on the organization’s mission, social impact, and resource management, rather than profit generation. The financial section typically includes funding sources, expenses, and projected budgets for programs and operations.

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What Is Break-Even Analysis?

Break-even point formula.

• Calculating BEP and Contribution Margin

Who Calculates the BEP?

Why break-even analysis matters, the bottom line.

• Investing Basics

Break-Even Analysis: Formula and Calculation

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Break-even analysis compares income from sales to the fixed costs of doing business. Five components of break-even analysis include fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP). When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs to begin generating a profit. The break-even point formula can help find the BEP in units or sales dollars.

Key Takeaways:

• Using the break-even point formula, businesses can determine how many units or dollars of sales cover the fixed and variable production costs.
• The break-even point (BEP) is considered a measure of the margin of safety.
• Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.

Investopedia / Paige McLaughlin

Break-even analysis involves a calculation of the break-even point (BEP) . The break-even point formula divides the total fixed production costs by the price per individual unit, less the variable cost per unit.

BEP = Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

Break-even analysis looks at the fixed costs relative to the profit earned by each additional unit produced and sold. A firm with lower fixed costs will have a lower break-even point of sale and $0 of fixed costs will automatically have broken even with the sale of the first product, assuming variable costs do not exceed sales revenue. Fixed costs remain the same regardless of how many units are sold. Examples of fixed and variable costs include:

Calculating the Break-Even Point and Contribution Margin

Break-even analysis and the BEP formula can provide firms with a product's contribution margin. The contribution margin is the difference between the selling price of the product and its variable costs. For example, if an item sells for $100, with fixed costs of $25 per unit, and variable costs of $60 per unit, the contribution margin is $40 ($100 - $60). This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin.

Contribution Margin = Item Price - Variable Cost Per Unit

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. Assume total fixed costs are $20,000. With a contribution margin of $40 above, the break-even point is 500 units ($20,000 divided by $40). Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.

BEP (Units) = Total Fixed Costs / Contribution Margin

To calculate the break-even point in sales dollars, divide the total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price.

Contribution Margin Ratio = Contribution Margin Per Unit / Item Price

BEP (Sales Dollars) = Total Fixed Costs / Contribution Margin Ratio

The contribution margin ratio is 40% ($40 contribution margin per item divided by $100 sale price per item). The break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%).

In accounting, the margin of safety is the difference between actual sales and break-even sales. Managers utilize the margin of safety to know how much sales can decrease before the company or project becomes unprofitable.

• Entrepreneurs
• Financial Analysts
• Stock and Option Traders
• Government Agencies

Although investors are not interested in an individual company's break-even analysis on their production, they may use the calculation to determine at what price they will break even on a trade or investment. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.

• Pricing : Businesses get a comprehensible perspective on their cost structure with a break-even analysis, setting prices for their products that cover their fixed and variable costs and provide a reasonable profit margin.
• Decision-Making : When it comes to new products and services, operational expansion, or increased production, businesses can chart their profit to sales volume and use break-even analysis to help them make informed decisions surrounding those activities.
• Cost Reduction : Break-even analysis helps businesses find areas to reduce costs to increase profitability.
• Performance Metric: Break-even analysis is a financial performance tool that helps businesses ascertain where they are in achieving their goals.

What Are Some Limitations of Break-Even Analysis?

Break-even analysis assumes that the fixed and variable costs remain constant over time. Costs may change due to factors such as inflation, changes in technology, or changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences.

What Are the Components of Break-Even Analysis?

There are five components of break-even analysis including fixed costs, variable costs, revenue, contribution margin, and the break-even point (BEP).

Why Is the Contribution Margin Important in Break-Even Analysis?

The contribution margin represents the revenue required to cover a business' fixed costs and contribute to its profit. Through the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit.

How Do Businesses Use the Break-Even Point in Break-Even Analysis?

The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even to measure its repayment of debt or how long that repayment will take to complete.

Break-even analysis is a tool used by businesses and stock and option traders. Break-even analysis is essential in determining the minimum sales volume required to cover total costs and break even. It helps businesses choose pricing strategies, and manage costs and operations. In stock and options trading, break-even analysis helps find the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions.

U.S. Small Business Administration. " Break-Even Point ."

Professor Rosemary Nurre, College of San Mateo. " Accounting 131: Chapter 6, Cost-Volume-Profit Relationships ."

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How to Write a Business Plan, Step by Step

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

ZenBusiness

A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

On a similar note...

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Top 10 Cost Analysis Templates with Examples and Samples

Vaishali Rai

Have you wondered why some products or services are priced higher than others? How do companies determine the cost of their products and ensure they make a profit? The answer lies in cost analysis - a crucial aspect for businesses that helps them understand the expenses associated with producing and delivering their offerings. In today's fast-paced and competitive business landscape, where every penny counts, mastering the art of cost analysis can make all the difference between success and failure for businesses.

Cost analysis is a process of identifying and examining the various expenses associated with producing and delivering a product or service. It involves a comprehensive review of all direct and indirect costs, such as raw materials, labor, overhead expenses, and marketing and distribution costs, to determine the actual cost of the offering. It is an essential tool for every business type and size to understand their finances better, optimize their operations, and stay competitive in the marketplace.

Is your company making the most of its resources? Find it out with our Cost-Benefit Analysis Templates ! 

Stay on top of your finances with Cost Analysis Templates

SlideTeam brings you a collection of ready-made cost analysis Templates to unlock the secret to financial success. Use our content ready and custom-made PPT Slides to assess expenses, identify areas for optimization, and boost your bottom line. Get ahead of the competition by using these actionable Templates that put you in control of your company's financial health.

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Template 1: Product Branding Repositioning and Cost Analysis Template

This Product Branding Repositioning and Cost Analysis PPT Template can be a game-changer for businesses looking to develop a new product. With this content ready PPT, businesses can brainstorm ideas, conduct a SWOT analysis, create a product roadmap, follow current market trends, understand customer needs, and analyze market trends to stay ahead of competitors. This ready-to-use Presentation features Slides on product roadmap , new product detailed cost analysis, category analysis, product life cycle, BCG matrix, Ansoff matrix, and more. It also includes professionally designed marketing and budgeting Templates to help businesses brand their products and attract consumers in the market. 

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Template 2: New Product Performance Cost Analysis PPT Slide

This pre-designed New Product Performance Cost Analysis PPT Slide is your best bet to dominate the market. Deploy this content-ready PowerPoint Template and showcase the expenses involved in creating new products, from raw materials to transportation. You can also present your marketing tactics, including guerilla marketing and social media, and reveal the revenue and costs of your new products with the Template’s intriguing quality infographics. Additionally, you can undertake a financial analysis of your investments, including land, equipment, employee costs, marketing costs, interior costs, and more.

Template 3: New Product Detailed Cost Analysis PPT Slide

Ready to boost your product's success? Look no further than our New Product Detailed Cost Analysis PPT Slide. Use our actionable PowerPoint Template to estimate costs and explain the production and operational expenses easily. Plus, our product launch cost PowerPoint graphic helps you create a cost-benefit analysis chart easily. In addition, you can highlight the costs and benefits of your new product, and our cost management strategy PowerPoint layout will help you scale your organization's financial stability in the market.

Template 4: New Product Development Cost Analysis PPT Slide

The New Product Development Cost Analysis PPT Slide will help you minimize production costs by showcasing the expenses of raw materials, equipment, and consumables. Our product strategy PowerPoint Slide allows you to conduct thorough market research, understand customer needs, and demonstrate the cost and benefits of new products. Using our product strategy, PPT Layout, and various product development models, you can deploy marketing techniques like guerrilla marketing, social media, and promotional videos for your product launch within a budget.

Template 5: New Product Cost Analysis PPT Slide

This 19-slide expertly crafted PPT Template covers everything you need to know about new product development. It highlights the production and operation cost analysis, cost-benefit charts, and marketing and launch price estimates. Its business and financial analysis Slides let you speculate, discuss, design, or demonstrate all aspects of a new product in the form of charts, graphs, and more.

Template 6: New Product Cost Analysis Report PowerPoint Slide

Optimize your business expenses and keep your budget on track with this helpful New Product Cost Analysis Report PPT Template. Compile data on your project's past and present revenue to determine the exact costs associated with providing services to your customers. It also includes an accurate cost-benefit analysis chart, helping you increase product performance and boost your organization's financial success.

Template 7: Product Cost Analysis PPT Template

Looking for an effective way to engage with your target audience and increase brand awareness? Our Product Cost Analysis PPT Template Bundle is just what you need! With high-quality content and graphics, this PPT Design will help you convey your ideas in a well-structured manner, giving you a competitive edge. You can use it to educate your audience on various topics and create compelling reports on product cost analysis to make prudent financial decisions. 

Template 8: Human Resource Recruitment Dashboard with Cost Analysis Template

Get ready to streamline your budget on human resource recruitment and training with our Dashboard and Cost Analysis Presentation! This set of slides showcases key data on the number of participants, training hours, online training, and cost per hour, giving you the insights, you need to make strategic decisions.

Template 9: Supply Chain Management with Cost Analysis Dashboard Template

Our Supply Chain Management with Cost Analysis Dashboard Template provides you with key performance areas (KPAs) such as net sales, average cash-to-cash cycle, and inventory carrying cost to help you understand the costs associated with the supply chain process. It covers topics such as supply chain costs, inventory carrying costs, warehousing, and average C2C cycle, making it an invaluable tool for any business looking to improve its bottom line.

Template 10: Project Forecast Cost Analysis Dashboard Template

Introducing the Project Forecast Cost Analysis Dashboard Template - your ultimate tool for accurate project budgeting! With this cutting-edge Template, track and analyze project costs in real-time, making informed decisions that keep your budget on track. The user-friendly interface provides detailed insights into cost projections, expenses, and variances, all presented in visually appealing charts and graphs. Stay ahead of the game with this powerful dashboard that streamlines your project management process, ensuring financial success. Say goodbye to budget surprises and hello to efficient cost analysis with our Project Forecast Cost Analysis Dashboard Template!

Understand Data Like a Pro!

As the saying goes, "Time is Money." And for businesses and organizations, wasting time on inefficient Excel sheets can be a costly mistake. That’s where our cost analysis Templates come in handy, which help you streamline your budgeting process, make informed decisions based on accurate data, and aid in product branding repositioning and cost analysis.

With customizable options, icons, graphics, and user-friendly interfaces, there's no excuse not to invest in one of the above Templates. So, wait no more! "Unlock the power of data-driven financial decisions with our cost analysis Slides today!

FAQs on Cost Analysis Templates

What does cost analysis mean.

Cost analysis evaluates the costs associated with a particular project, product, or service. It includes examining and breaking down all the expenses involved in creating or delivering a product or service, including materials, labor, overhead, and other related costs.

Cost analysis helps businesses to determine the actual cost of their product or service, identify areas where costs can be reduced or optimized, make financial decisions based on the generated data, track financial performance, improve their work processes, and stay competitive in the marketplace.

What is a cost analysis example?

A cost analysis example could be the evaluation of different options for purchasing a new piece of equipment for a manufacturing company. The cost analysis would involve comparing the costs associated with different equipment options, including the initial purchase cost, ongoing operational costs, maintenance costs, and potential cost savings or revenue generation opportunities associated with each option. The cost analysis would help the company determine which equipment option offers the best value for money, taking into account both upfront costs and long-term costs, to make an informed decision based on financial considerations.

What are the four types of cost analysis?

• Economic impact analysis: This type of cost analysis measures the economic effects of a particular policy, project, or event. Economic impact analysis comprehensively covers direct and indirect effects on various economic indicators such as employment, income, and economic output. It can help decision-makers understand a policy or project's potential economic benefits and costs.
• Marginal cost analysis: This involves examining the additional cost incurred by producing an additional unit of a product or service. Marginal cost analysis can help organizations determine the most efficient production level and make insightful pricing and resource allocation decisions.
• Life cycle cost analysis: This involves examining the total cost of a product or service over its entire life cycle, including initial investment, maintenance, and disposal costs. Life cycle cost analysis can help organizations make informed decisions about product development, pricing, and resource allocation.
• Cost-effectiveness analysis: This type of cost analysis involves comparing the costs of different interventions or programs with their respective outcomes or benefits. Cost-effectiveness analysis typically involves quantifying the outcomes in non-monetary terms, such as health interventions, environmental policies, etc. This type of analysis can help decision-makers compare different interventions or programs to identify the most cost-effective method which can impact resource allocation and investment decisions.

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Tesla Will Lay Off More Than 10% of Workers

Along with the departure of two senior executives, the cuts added to signs of turmoil at the electric car company.

By Jack Ewing

Signs of turmoil at Tesla multiplied on Monday after the electric car company told employees it would lay off more than 10 percent of the work force to cut costs and two senior executives resigned.

The job cuts, amounting to about 14,000 people, come as the company faces increasing competition and declining sales. The management changes and layoffs are a reminder of the unpredictability of Elon Musk, Tesla’s chief executive, at a critical time for the company.

Mr. Musk has not outlined a plan to reverse a decline in car sales, and he appears focused on long-shot ventures such as a self-driving taxi, rather than new models that would help Tesla compete with cars being introduced by established carmakers and new rivals from China.

“As we prepare the company for the next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity,” Mr. Musk told employees in a Monday morning email, a copy of which was reviewed by The New York Times.

“There is nothing I hate more, but it must be done,” he wrote.

Hours after that email, Drew Baglino, a senior vice president who has played a big role in the company’s rise from start-up to dominant electric car maker, said he had resigned.

“I made the difficult decision to move on from Tesla after 18 years yesterday,” Mr. Baglino said in a post on X, the social media site. Mr. Baglino is one of only three managers besides Mr. Musk listed as a top executive on the company’s website . His longevity was unusual at a company known for high management turnover.

Mr. Baglino may have been blamed for some of Tesla’s recent troubles, said Gary Black, managing partner of the Future Fund, an investment firm. “Someone has to take the fall for the sharp deceleration in deliveries growth, near record inventories, and declining margins and it wasn’t going to be Elon,” Mr. Black said on X.

Tesla also appeared to be losing an executive key to winning regulatory approval for self-driving technology. Rohan Patel, a former aide to President Barack Obama who was Tesla’s head of policy and business development, tacitly confirmed reports that he was leaving. In a post on X, Mr. Patel thanked his co-workers and Mr. Musk for “the past eight years at Tesla.”

“My plans are to be a recess monitor for my second grade daughter, practice my violin, go to a bunch of bucket list sporting events and take my very patient wife on some long intended travel,” Mr. Patel said.

Investors often welcome job cuts because they can lead to higher profits. But that was not the case Monday, with Tesla shares ending the day down more than 5 percent.

Tesla regularly culls its work force to remove employees whose performance managers consider weak, but the numbers are typically smaller. “This is something Elon and Tesla have consistently done throughout his career,” said Scott Acheychek, chief executive of REX Shares, which offers funds investors use to bet on or against Tesla’s stock. “Ten percent is pretty big,” Mr. Acheychek added.

Mr. Musk’s email to employees was earlier reported by Electrek, an online news site, and Handelsblatt, a German business newspaper.

Mr. Musk did not indicate where the cuts would be made. Many of Tesla’s workers are based at four large car factories in Fremont, Calif., Austin, Texas, and Shanghai and near Berlin. Tesla also has a factory in Buffalo that produces charging equipment and a factory near Reno, Nev., that makes batteries.

The layoffs may help the United Automobile Workers union’s efforts to organize Tesla employees in the United States. The company’s workers may be more open to the union if they believe that representation would give them greater job security. Workers at a Volkswagen factory in Tennessee will vote this week on joining the U.A.W., and Mercedes-Benz workers in Alabama will vote next month.

Mr. Musk’s many other ventures, and his penchant for making polarizing political statements, have raised questions about his focus on managing Tesla. Wall Street is increasingly concerned about the company: Tesla’s share price has lost about one-third of its value this year.

Many investors had expressed hope that Tesla would revive flagging sales by introducing a car that would sell for about $25,000 as early as next year, increasing the number of people who could afford the company’s cars and responding to competition from Chinese companies that are already selling electric cars for as little as half that price tag.

Mr. Musk cast doubt on those plans by announcing this month that Tesla would unveil a Robotaxi in August. The self-driving taxi is seen as a long shot, in part because even the most advanced systems available today sometimes make glaring mistakes. In addition, federal and state regulators will have to sign off before Tesla can put such taxis on the road.

This month, Tesla reported a decline in sales that caught investors off guard . The company said it delivered 387,000 cars worldwide in the first quarter, down 8.5 percent from the year before. It was the first time Tesla’s quarterly sales had fallen on a year over year basis since the start of the pandemic in 2020.

The company slashed prices significantly over the course of 2023 to increase demand, which has reduced the profit Tesla makes on each car. Last week, Tesla reduced the price of its most advanced driver-assistance software to $99 a month from $199. But price cuts appear to be losing their effectiveness. Tesla will announce its financial results for the first quarter on April 23.

Rivals like BYD of China, BMW of Germany, and Kia and Hyundai Motor of South Korea reported increases in electric vehicle sales for the same period, suggesting that slower overall demand for battery-powered models was not the only explanation for Tesla’s problems.

Established companies are closing the gap with Tesla on battery technology, and have been building new assembly lines to achieve the cost savings made possible by mass production. Honda plans to begin producing electric vehicles at a factory in Marysville, Ohio, next year.

Hyundai will begin producing electric cars at a new factory in Georgia in October, José Muñoz, the president and global chief operating officer of Hyundai Motor, said in an interview last month. Hyundai will also begin allowing customers to buy cars on Amazon, an answer to Tesla’s practice of selling cars online.

Mr. Muñoz said that customers had been willing to pay more for Hyundai electric cars than they would for comparable Teslas. “At the beginning, Tesla was premium,” he said. “Now we’re premium .”

Jason Karaian and Melissa Eddy contributed reporting.

Jack Ewing writes about the auto industry with an emphasis on electric vehicles. More about Jack Ewing

The World of Elon Musk

The billionaire’s portfolio includes the world’s most valuable automaker, an innovative rocket company and plenty of drama..

A $47 Billion Pay Deal: Despite   facing criticism that Tesla is overly beholden to Elon Musk , its board of directors said that the company would essentially give him everything he wanted, including the biggest pay package in corporate history.

Tesla: The company has agreed to recall nearly 4,000  of its Cybertruck pickups to fix an accelerator pedal that can get stuck, raising the risk of crashes, a federal safety agency said.

SpaceX: President Biden wants companies that use American airspace for rocket launches to start paying taxes into a federal fund  that finances the work of air traffic controllers.

Business With China : Tesla and China built a symbiotic relationship that made Elon Musk ultrarich. Now, his reliance on the country may give Beijing leverage .  

The Musk Foundation: After making billions in tax-deductible donations to his charity, Musk has failed recently to donate the minimum required to justify a tax break  — and what he did give often supported his interests.

OpenAI: Musk, who helped found the A.I. start-up in 2015, has filed a lawsuit  accusing the company and its chief executive  of breaching a contract  by putting profits and commercial interests ahead of the public good.

The dirty secret of the housing crisis? Homeowners like high prices

Large chunk of housing demand in canada comes from investors.

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If you listen to Canadian politicians, the solution to our housing crisis seems to be some combination of immigration reform and a herculean countrywide building effort.

But Paul Kershaw, a public policy professor at the University of British Columbia and founder of the affordability advocacy group Generation Squeeze , says the emphasis on increasing housing supply obscures an issue politicians are less likely to address.

Namely, that we, as a country, have become addicted to ever-rising home prices, largely because we've been conditioned to see our homes as financial assets.

"There are multiple things we need to do [to reduce prices], and more supply is one of them," said Kershaw. But funding announcements for building projects are a "way to organize our concern about the housing system so that we don't have to … look in the mirror — particularly homeowners who have been homeowners for a long time — and say: 'How are we entangled?'"

He said the current system incentivizes extracting profit from real estate, rather than prioritizing that everyone has access to affordable shelter.

"We need clarity about what we want from housing," said Kershaw. "And it has to start with: 'We don't want these prices to rise any more.'"

'Get out of the way,' Trudeau tells provinces opposed to federal housing plan

Speculative effect.

The trajectory of home prices is well-known to most Canadians. According to the Canadian Real Estate Association, the average home in January 2005 sold for $241,000. By February 2022, it had more than tripled, before easing somewhat to $719,400 in February 2024.

On Friday, Royal LePage released a forecast that suggested the aggregate price of a home in Canada will increase nine per cent year-over-year in the fourth quarter of this year.

Meanwhile, earnings in Canada have lagged significantly behind housing costs, such that the ownership costs on an average home consume more than 60 per cent of median household income, according to a recent RBC report .

On the face of it, the lack of affordable housing seems like an issue of supply — just build more to meet demand and prices will come down. 

But part of the problem is the source of that demand: it's increasingly investors. 

The Bank of Canada found that investors were responsible for 30 per cent of home purchases in the first three months of 2023. That's up from 28 per cent in the same period in 2022 and 22 per cent in the same period in 2020. 

That report also found the percentage of first-time homebuyers dropped to 43 per cent in the first quarter of 2023 from 48 per cent in the same three months in 2020.

"What's been happening over the last 10 years is that the share of homes bought by first-time buyers has been declining, and their market share has largely been taken over by investors," said John Pasalis, president of Toronto-based Realosophy Realty.

The Bank of Canada's definition of an investor is a buyer who took out a mortgage to purchase a property while maintaining a mortgage on another home.

The central bank has said that "during housing booms, greater demand from investors can add to bidding pressures and intensify price increases."

Who's investing?

Early in the COVID-19 pandemic, we saw an uptick in people buying second properties. 

Robert Hogue, assistant chief economist at RBC, says a combination of low interest rates at the time and many people sitting on large savings "encouraged speculative activity."

But he doesn't see current high prices "as only being a problem of speculative activity."

House-flippers and foreign buyers are often singled out as major drivers of real estate speculation, and various jurisdictions in Canada have introduced legislation to neutralize those kinds of investments.

• Federal government plans to lease public lands for construction through new housing strategy
• What's the most expensive home you could afford?

But Pasalis said those types of buyers aren't having a major influence on prices. Domestic investors in the low-rise housing market are having a much greater impact.

He said they generally fall into two categories: those who buy directly from developers and those who are moving but decide to hold on to their first residence.

"If they're upsizing or moving out of the province or country, the first question we get is: 'Can we keep our current home as a rental?'" said Pasalis. 

"They're not like active investors. They're just looking at the market, they're looking at how quickly home prices are going up. Everyone sees housing as a decent investment, so everyone's mindset is: Why should I sell it?"

It's one reason there's less housing supply for first-timers.

Should I get a 30-year mortgage? | About That

A historic problem.

Purchasing a home has a variety of benefits. It gives many people a sense of accomplishment and the security of knowing they can't be evicted. It also allows them to build up equity, which can help fund renovations, a move to another residence and even retirement. 

Many families pass properties on to subsequent generations, which also makes home ownership something of an emotional investment.

Higher prices help existing homeowners tap more home equity and reap greater profits if and when they do decide to sell. 

Governments also have an interest in high property values because they translate to larger tax revenue, said Diana Mok, associate professor of real estate at the Lang School of Business and Economics at the University of Guelph in southern Ontario.

Not only that, but real estate is the single-biggest contributor to Canadian GDP, according to Statistics Canada.

"The housing market encompasses a very large variety of sectors — think about realtors, think about lawyers, think about construction," said Mok. It's not just "all the buying and selling, but it's all the labour that contributes to the economy."

While Prime Minister Justin Trudeau has publicly lamented high prices, Hogue said he can't imagine "any government that would intervene to lower home prices as an objective. I don't think that would be a winner from a political point of view."

Naama Blonder, an architect and urban planner with the Toronto-based firm Smart Density, says part of the problem is a societal obsession with home ownership.

"I think many Canadians think that when we are talking about the affordability crisis, we are talking about their ability to own a house with a backyard. 

"For them, 'We are priced out of owning a house, therefore, we have an affordability crisis that we need to solve.' I have news for you … what worked for our parents is not going to be the model for us," said Blonder.

"We don't have politicians who are bold enough to say: 'It's more than OK to rent.'"

The upcoming federal budget on Tuesday will undoubtedly contain a number of measures to address the housing shortage. Recent funding announcements have responded to the desire for more rental housing, but the scale of the need is daunting.

• Freeland announces housing affordability measures for first-time buyers, current owners

In a 2024 report, the Canada Mortgage and Housing Corporation said despite a record number of projects started between 2021 and 2023, "this increase will not meet the growing demand. As a result, rental markets will remain tight, particularly in the pricier areas of Canada."

Pasalis said that for all the hand-wringing over housing prices, he doesn't see there being any political will to rein in investors. And he's skeptical of the federal government's recently announced financial incentives to help first-time buyers get into the market.

Putting young people further in debt "is not a way to make housing more affordable," he said. 

Kershaw of Generation Squeeze says a broader "tax shift" is required. He advocates an annual tax on "housing wealth" aimed at the owners of the most valuable 10 per cent of homes in Canada as one way to dampen housing prices, while also raising funds to invest in affordable housing.

• Why Canada's ban on foreign buyers hasn't made homes more affordable
• Toronto mayor's executive committee endorses 10% speculation tax on foreign home buyers

"What started happening in B.C. and spread throughout the country is that we weren't just satisfied with paying off our mortgage to build equity. We're like: 'You know what? I want this home price to double, triple, quadruple.'"

When existing homeowners want prices to rise faster than earnings in the local economy "is the moment you want a wealth windfall for those who are owners now that will come, by definition mathematically, at the expense of affordability for those who follow," Kershaw said.

"That's the trouble we've gotten ourselves into. And if we cannot have that conversation, we will never solve the crisis of housing affordability."

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Nike Says Job Cuts at Oregon Headquarters to Total More Than 700

Nike Inc. will have eliminated about 740 jobs at its headquarters by late June as part of its multiyear cost-cutting plan.

In a filing with the state of Oregon on Friday, Nike’s vice president of people solutions, Michele Adams, said that this represents a “second phase of impacts” as the world’s largest sportswear company trims its workforce.

Chief Executive Officer John Donahoe said in December that Beaverton, Oregon-based Nike would slash its global headcount by 2% as management seeks as much as $2 billion in cost savings over the next three years.

Initial layoffs at Nike began in February and the company expected to conclude the process by the end of its fiscal year, according to an internal memo reviewed by Bloomberg News.

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“To compete, we must edit, shift and divest less critical work to create greater focus and capacity for what matters most,” Donahoe said in the memo.

By Kim Bhasin and Leslie Patton; With assistance from Bill Haubert

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How Nike Ran Off Course

The American sportswear giant is experiencing its worst slump in a decade. New competition is part of the problem but according to industry insiders and athletes, many of Nike’s wounds are self-inflicted: the results of disruptive restructurings, stalled innovation and uninspiring marketing.

• John Donahoe

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US Sues to Block $8.5 Billion Union of Coach, Michael Kors

Antitrust enforcers said Tapestry’s acquisition of Capri would raise prices on handbags and accessories in the affordable luxury sector, harming consumers.

Op-Ed | How Long Can Adidas Surf the ‘Terrace’ Trend?

As a push to maximise sales of its popular Samba model starts to weigh on its desirability, the German sportswear giant is betting on other retro sneaker styles to tap surging demand for the 1980s ‘Terrace’ look. But fashion cycles come and go, cautions Andrea Felsted.

How Rent the Runway Came Back From the Brink

The rental platform saw its stock soar last week after predicting it would hit a key profitability metric this year. A new marketing push and more robust inventory are the key to unlocking elusive growth, CEO Jenn Hyman tells BoF.

For Struggling Public Companies, Going Private Is No Panacea

Nordstrom, Tod’s and L’Occitane are all pushing for privatisation. Ultimately, their fate will not be determined by whether they are under the scrutiny of public investors.

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