Cost benefit analysis (CBA)
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 31 January 2012.
The Meaning of Total Cost Benefit Analysis
The term Cost benefit analysis is used frequently in business planning and decision support. The term, however, has no precise or standard definition beyond the idea that both positive and negative consequences of a proposed action are going to be summarized and then weighed against each other.
The term also has no universally agreed spelling. It is written as cost benefit, cost/benefit, cost-benefit, or benefit/cost for instance. Because the term "cost benefit analysis" does not refer to any specific approach or methodology, the business person who is asked to produce one should take care to find out what is expected or needed.
The term covers several varieties of business case analysis, such as:
All of these approaches to cost benefit analysis attempt to predict the financial impacts and other business consequences of an action. All these approaches have the same structural and procedural requirements for building a strong, successful business case. They differ primarily in terms of:
- How they define "cost" and "benefit" in practical terms.
- Which costs and benefits are included for analysis.
- Which financial metrics are important for decision makers and planners.
For practical guidance on cost benefit analysis and other business case issues, see the Business Case Essentials or the Business Case Guide. For working examples and spreadsheet templates of financial metrics used in cost benefit analysis, download the free spreadsheet tool Financial Metrics Lite, or see the more in-depth and complete coverage in Financial Metrics Pro.
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