An economic analysis is a process in which business owners gain a clear picture of the existing economic climate, as it relates to their company’s ability to thrive. Economists, statisticians, and mathematicians often carry out this analysis on behalf of for-profit and nonprofit businesses. These types of economic evaluation consist of an in-depth appraisal of the strengths and weaknesses of the market. An economic analysis isn’t limited to medium or large-sized businesses, it’s valuable for small companies as well. In fact, small businesses probably need to perform economic analysis more often than businesses that have enough built-in capital and resources to sustain an economic downturn. There are several types of economic evaluation methods business owners can use to gain a comprehensive view of how their companies will fare in the future.
One of the most effective types of economic evaluation is the cost-benefit analysis, also referred to as a benefit-cost analysis. This is a technique used to determine whether a project or activity is feasible by weighing the monetary cost of doing the project or activity versus the benefits. A cost-benefit analysis will always compare the cost of the effort against the benefits that result from that effort. Because it deals solely in monetary terms, a cost-benefit analysis is one of the most bottom-line types of economic evaluation. It can provide valuable insight in comparing and contrasting work projects, help determine whether an investment opportunity is ideal, and help assess the consequences of implementing changes to your business. However, there is a drawback to this analysis as it is difficult to place a monetary value on some activities such as the benefits of increased public safety versus the cost to increase law enforcement presence in major cities. After performing the cost-benefit analysis, a small business owner can make an educated business decision.
In a cost-effective analysis, you weigh the effectiveness of a project against its price. Unlike with cost-benefit analysis, however, a low cost doesn’t mean high effectiveness, and the reverse is also true. For example, let’s say you’ve determined that installing an automated system that can handle customer orders 24-hours a day, seven days a week, is the cheapest way to boost your incoming orders. After research, however, you determine that many calls that come into the automated system are not complete, because callers hang up when they hear the automated voice on the system. Your market research also indicates that your customers want to speak to a live representative. A cost-effective analysis would tell you that the cheaper route of installing an automated system is not effective in processing more orders. Depending on the type of business you own, you may find that saving money doesn’t result in creating a desirable effect on your business.
As the term suggests, cost-minimization analysis focuses on finding the cheapest cost to complete a project. This is one of the economic evaluation methods that business owners use when cost savings are at a premium and outweigh all other considerations. It is also used when there are two or more ways to accomplish the same task. Cost-minimization analysis is most often used in healthcare. For example, drug manufacturers may compare two drugs that have been shown to produce the same effect in patients, or a pharmaceutical company may implement cost-minimization analysis, to determine which of two medications that treat the same illness will cost the least amount of money to produce. In many instances, the generic equivalent of a name-brand drug is the least expensive drug to manufacture, especially if it produces the same therapeutic effect in patients.