For any printer facing major decisions on buying new equipment, a cost-benefit analysis will go some way to help ensure they don’t make the wrong decision. Done properly, it allows the business owners to determine whether it’s worth the investment or if it’s just too risky.
A cost-benefit analysis process evaluates trade-offs. This helps the printer set priorities. The result: better choices that ensure cashflow remains healthy.
The first step is to evaluate foreseeable costs and set out the foreshadowed – but quantifiable – cashflows over the period of time during which the changes are being implemented. That means one thing: examining all the costs and all the benefits and tallying them into quantifiable amounts. This means that nothing – absolutely nothing – should be left out, including hours that are worked and other resources that are utilised. Every cost needs to be put beside a dollar figure.
Costs can be direct and indirect. Direct costs would obviously include the size of the investment, maintenance costs and, in certain circumstances, licensing fees and perhaps consulting costs.
Indirect costs would include training, leasing, telecommunications charges and computer support, transport costs and of course, labour costs.
It is also important to calculate the amortisation costs of any equipment. Remember, a piece of equipment might be good for 10 years but under the accounting treatments, it might only be on the company’s books for four.
Then there are the opportunity costs. These are the potential benefits if, for example, the business owner had spent the money on a different project and made a different investment. An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the opportunity cost is the benefit you could have received by taking an alternative action. This is where the rubber meets the road, where hard decisions need to be made.
The business owner is left with what number crunchers call all-inclusive costs. The inflation rate has to be factored into the calculation as this is done over a period of time.
Calculating the benefits is pretty much the same process. Like the costs, it has to be inclusive and nothing should be left out. And as with the costs, every benefit needs to be tabulated with a dollar figure. And again, inflation needs to be factored into the equation.
After going through that, the costs are then subtracted from the benefits and the owner then has a better idea of whether or not the investment should go ahead.
In a nutshell, the cost-benefit analysis can be done in two ways. A simple cost-benefit analysis for a printer buying a piece of equipment might be to look at the purchase price (ie, costs) and subtract those from the expected earnings (benefits) over time.
The problem with that approach is that it’s ignoring other costs.
The printer would get a better picture if they incorporated other factors like depreciation, interest on money they borrowed to make the purchase, the expense of maintaining the equipment and the operator’s wages, not to mention any other costs.
At the end of this process, the printer needs to incorporate the calculations of this cost-benefit analysis and put it into a business case to support the investment. The cost-benefit analysis allows the business to determine whether it’s worth going ahead with the investment. But without that analysis, it can be too big a risk.
Leon Gettler is a senior business journalist who writes for a range of leading newspapers and journals
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