The cost benefit evaluation method and the cost effectiveness evaluation method are two different tools that businesses may choose to use to help make business decisions. Both methods involve comparing the future or impending purchase of new equipment or programs based on their cost and their expected benefits to the company, but one may be more suitable for certain circumstances than the other. For instance, a company may find it best to use a cost effectiveness evaluation to narrow down a list of new equipment choices or programs, and a cost benefit method to analyze whether to adopt the final choice or choices.
About the Cost Benefit Method
Companies use the cost benefit method to help make financial decisions, particularly those that involve the purchase of new equipment. The cost benefit method involves placing factors in two columns on paper. In the first column, the company lists all of the financial benefits the new equipment or software will provide. Such benefits might include improved productivity, lower supply costs and increased business. In the second column, the company lists the concrete and peripheral costs of the new equipment or software. This includes the basic cost of the equipment, any business lost during the transition to the new equipment, training costs, the cost of changing suppliers, and the like. Administrators, managers or executives look for options whereby the financial benefits outweigh the costs.
Cons of the Cost Benefit Method
The cost benefit method uses hard numbers to inform decisions, and some of these numbers can be misleading at first glance. When using the cost benefit method, you must be aware of all of the intangible benefits that may come from the business decision. For example, a switch to new software may allow the company to attract a larger pool of qualified employees, or a particular advertising strategy may weigh better with customers and improve customer loyalty. The large cost of a decision may quickly overshadow many of the intangible benefits if they are not accurately calculated.
About Cost Effectiveness Evaluation
A cost effectiveness evaluation is more complex than the cost benefit method because it involves more components. This method may be favored before the cost benefit method to narrow down a list of potential programs or new equipment to purchase. Rather than looking solely at the monetary value of the change, this method looks at the broader effects of the program. For example, a company may evaluate which employees will receive the greatest benefits from a specific training program and whether the costs of that training program will still be beneficial if certain employees leave the company.
Cons of Cost Effectiveness Evaluation
Because the cost effectiveness evaluation method does not always take into account all of the costs of a new program or equipment, it may fail to consider items such as the cost of training new employees or other additional costs that will accompany the program and equipment . Often this method takes into account only individuals currently involved in the business or program and does not account for newcomers who will need to be trained or what will happen if key individuals leave the business, taking specific skills sets with them.