It is known commonly that risks and injuries that occur in any company will lead to an increase in the compensation cost along with the insurance cover. Additionally, it will have a great impact on the reputation and morale of the companies. In order to lower the cost of loss covering due to risks and injuries, cost of benefit analysis is introduced.
What is the cost of benefit analysis (CBA)?
According to Bhasin (2019), “Cost-benefit analysis is defined as an approach to determine the weaknesses and strengths of action in business. It is decision-making the concept employed to understand the cost of a given transaction by comparing it with the derived benefits. The cost-benefit analysis determines the best course of action to achieve benefits”.
Advantages
One of the main advantages of the cost of benefit, analysis is that it is easy to understand and comprehensible to everyone with different backgrounds, expertise, and areas of study. Additionally, it bypasses the business terms boundaries which mean it can be easily understandable for anyone who does not understand most of the words from the business dictionary. There are other notable advantages, and they are being objective, raising safety awareness and identifying the important and opportunity cost. According to Hamel (2018), the cost of benefit analysis “provides an objective way to compare projects” and “comparing projects based on the actual financial costs and benefits eliminate the emotional element and may overcome biases for the good of the business”. By identifying not only the compensation cost, and insurance cover, the methodology also helps the company raises its awareness of its working environment safety because insurance cover and compensation cost are extremely expensive and costly and they help the company realizes the importance of having a healthy and safe workplace.
Disadvantages
There are many limitations or disadvantages that need to be known before using the cost of benefit analysis methodology. Firstly, it is difficult to achieve absolute accurate data. Occasionally, some data about the cost can be omitted o, not being thoroughly analyzed, or not being officially published. Secondly, it can be easily turned into a project budget and can lead to the goals and error being impractical and impossible to achieve (Plowman 2009). Finally, the methodology is only applicable to small or mid-scaled business. According to Kenton (2020), “for very large projects with a long-term time horizon, a cost-benefit analysis might fail to account for important financial concerns such as inflation, interest rates, varying cash flows, and the present value of money”.
Should the Cost-Benefit Analysis be carried out in every organization?
The cost-benefit analysis can be carried out by small or mid-sized businesses but not large-scaled businesses. From what has been mentioned above in the disadvantage, the main reasons why it cannot be applicable for the large-scaled business is that it is unsuccessful to clarify the important financial concerns and considerations. Additionally, with large-scaled influence and reputation, one wrong mistake in the cost information can have an impact on the company’s reputation and morale as the cost of insurance and compensation for risks and injuries will rise.
References
Bhansin, H 2019, Cost-Benefit Analysis: Advantages, Limitations, Examples, and Relevance, Marketing91, viewed 28th Nov 2020, <https://www.marketing91.com/cost-benefit-analysis/>.
Hamel, G 2018, Advantages of a Cost-Benefit Analysis, azcentral, viewed 28th Nov 2020, <https://www.marketing91.com/cost-benefit-analysis/>.
Kenton, W 2020, Cost-Benefit Analysis, Investopedia, viewed 28th Nov 2020, <https://www.investopedia.com/terms/c/cost-benefitanalysis.asp>.
Plowman, N 2009, Disadvantages of Using a Cost Benefit Analysis, Bright Hub PM, viewed 28th Nov 2020, <https://www.brighthubpm.com/project-planning/58627-arguments-against-the-cost-benefit-analysis/#:~:text=The%20Disadvantages%20of%20a%20Cost%20Benefit%20Analysis,-1.&text=A%20cost%20benefit%20analysis%20requires,be%20identified%20and%20appropriately%20quantified.&text=These%20two%20tendencies%20lead%20to,risk%20and%20inefficient%20decision%2Dmaking.>.
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