Why you should complete a cost-benefit analysis when applying for business finance

A cost-benefit analysis is an excellent systematic process that can be used to evaluate the financial impacts on a company when applying for business finance. It compares the total expected costs with the total expected benefits and determines whether proceeding with an application is viable and beneficial. This analysis helps businesses assess all financial impacts, enabling them to make accurate and informed decisions.

There are several steps involved in completing a cost-benefit analysis:

Step 1: Explain why the funding is required. Is it for a new project, investment, purchase of an asset, or to fulfill a business objective?

Step 2: Identify all costs (both direct and indirect). These can include capital outlays, operating expenses, and maintenance charges.

Step 3: Clearly state the benefits. These could include areas such as increased revenue, cost savings, improved productivity, and enhanced customer service.

Step 4: Outline a timeline for the funding. When is it needed, for what period, and should any contingency periods be considered?

Step 5: Calculate the NPV (net present value) by comparing the value of benefits against the value of costs. A positive NPV indicates a favourable outcome.

Step 6: Test the robustness of the application by varying rates and charges to see how these could impact the overall outcome.

Step 7: Make an accurate forecast to conclude whether the project is viable and worth pursuing. If the results are not positive, revise the plans and start the cost-benefit analysis again.

Now, let’s explore why a cost-benefit analysis is so important:

• It enables informed decisions by providing a clear understanding of the financial implications and available options.
• Resources can be easily allocated, helping to prioritize projects and investments that offer the highest return on investment.
• Any potential financial risks can be highlighted, with strategies developed to quickly mitigate them.
• It allows for accurate financial planning through the development of financial forecasting and budgets.
• It provides full transparency and accountability, keeping stakeholders, investors, and other influential organizations well informed.
• It keeps the business strategy on track and fully aligned with all new projects and investments.

To summarise, a cost-benefit analysis is an excellent tool when applying for business finance. It systematically assesses the financial viability of investments to ensure it is the right option. By comparing costs versus benefits, a data-driven decision can be made, supporting sustainable growth and positive financial health.

If you have any questions regarding a cost-benefit analysis or would like to know more about the benefits of business finance, please call us at 01993 706403 or email us at enquiries@ngifinance.co.uk.