Small Business Cost Benefit Analysis on Capital Expenditures

Small Business Cost Benefit Analysis on Capital Expenditures

In every company’s history, there comes a time when they must decide upon a capital expenditure. When faced with such a decision, using a cost benefit analysis is often the surest way to minimize the incidence of failure. It’s not an easy decision to make, but when it comes to growing a business, sometimes that purchase makes all the difference.

What is a Cost Benefit Analysis?

When it comes to doing a cost benefit analysis, while it might seem like an involved process, it really just amounts to collecting the right information. When companies don’t take the time to properly review all the criteria, they can easily purchase something next to impossible to unload. For instance, if a company wanted to purchase a new machine or ERP software package, and wanted to be able to justify the purchase, it might involve the following steps.

Assess Product’s Quality

Make sure to do the appropriate research into the equipment’s reputation, or the software’s customer service support capabilities. Talk to other users, and make sure that equipment has a high resale value, and that software isn’t problematic. Ease of use is key in these situations.

 Assess Cost of Ownership

The actual purchase itself doesn’t end the process. All those spare parts, possible repairs, and consumables needed to run the equipment, are an essential aspect of the analysis. In terms of the software, does it require upgrades and if so, how much and when? Make sure to document these costs.

Determine Time to Pay

Essential to moving forward with the purchase, is an understanding of time required to pay. Does that machine the company bought allow them to increase their manufacturing productivity rate? What does that additional capacity mean in terms of gross profit? Will that ERP program eliminate time consuming operations between departments, and what is the benefit of eliminating this redundancy?

Determine Frequency of Use

What is the 5 and 10 year forecast for the product that machines makes, and is it easily converted to make other products? How long will that software package continue to be used before it needs an upgrade or needs to be replaced? In both instances, will the technology become outdated over time?

While each of these are merely summaries of how to justify the decision, it is important to make sure to address each of these steps at length. Companies must do their homework when it comes to moving forward with a capital expenditure. That decision is never to be taken lightly. In some cases, buying that piece of equipment involves an in-depth market trend analysis, and product life-cycle review, in order to make sure that the products made on that line, will be needed well into the future. In addition, ensuring the technology will be applicable 5, or even 10 years down the road, is another important consideration.