ENTREPRENEUR0:

Making an investment is always a risky business. A company can never be sure if spending money now will definitely lead to profits in the future. However, companies can make an informed decision about an investment by calculating the cost of the investment, comparing it to the potential profit, then factoring in the amount of time it could take to make that profit. This is called 'Cost Benefit Analysis', or 'CBA'. Let me give you an example .... Say a company wants to install new cutting edge sales software in every computer in each of their offices nationwide, and the software costs one hundred million dollars.

Making an investment is always a risky business. A company can never be sure if spending money now will definitely lead to profits in the future. However, companies can make an informed decision about an investment by calculating the cost of the investment, comparing it to the potential profit, then factoring in the amount of time it could take to make that profit. This is called 'Cost Benefit Analysis', or 'CBA'. Let me give you an example ... Say a company wants to install new cutting edge sales software in every computer in each of their offices nationwide, and the software costs one hundred million dollars.
ENTREPRENEUR1:

What they then have to do is work out all the other potential costs related to installing the software. CBA only gives a realistic figure if all the costs are analyzed realistically and honestly. So .... The software costs one hundred million dollars. However, extra costs might include installation and staff training. The amount of IT engineers needed to install the software, and their working hours, has to be calculated, then how long it would take and how much it would cost to train the sales staff to use it.

What they then have to do is work out all the other potential costs related to installing the software. CBA only gives a realistic figure if all the costs are analyzed realistically and honestly. So ... The software costs one hundred million dollars. However, extra costs might include installation and staff training. The amount of IT engineers needed to install the software, and their working hours, has to be calculated, then how long it would take and how much it would cost to train the sales staff to use it.
ENTREPRENEUR2:

So, say the projected costs come to five million dollars for installation and ten million dollars for training that makes a total projected cost of 115 million dollars. But don't panic! Now you can work out the potential profits .... Say the company makes a profit of ten million dollars each month, but the new software will allow the sales staff to do their job at least twice as efficiently. This would mean an extra ten million dollars a month and a twenty million dollar a month profit.

So, say the projected costs come to five million dollars for installation and ten million dollars for training that makes a total projected cost of 115 million dollars. But don't panic! Now you can work out the potential profits ... Say the company makes a profit of ten million dollars each month, but the new software will allow the sales staff to do their job at least twice as efficiently. This would mean an extra ten million dollars a month and a twenty million dollar a month profit.
ENTREPRENEUR3:

Now the 'payback time 'needs to be taken into consideration. To do this, the total cost is simply divided by the projected monthly profit. This can give a company some idea of how long they might have to wait before they start making an overall profit on their investment. 115 million divided by twenty million, that's 5.75.. In other words, if all goes to plan, the total investment should be paid off after five and three quarter months.

Now the 'payback time 'needs to be taken into consideration. To do this, the total cost is simply divided by the projected monthly profit. This can give a company some idea of how long they might have to wait before they start making an overall profit on their investment. 115 million divided by twenty million, that's 5.75. In other words, if all goes to plan, the total investment should be paid off after five and three quarter months.
ENTREPRENEUR4:

By the six month mark, the company should be making a profit. 'Cost Benefit Analysis', if done carefully and honestly, can mean the difference between win or bust for a company. It is, however, never 100 per cent accurate forecast, because in business, as in life, any investment is always a risk.

By the six month mark, the company should be making a profit. 'Cost Benefit Analysis', if done carefully and honestly, can mean the difference between win or bust for a company. It is, however, never 100 per cent accurate forecast, because in business, as in life, any investment is always a risk.