When should you present a return on investment (ROI) report, and when should you present a cost-benefit analysis (CBA) report? Like many questions in finance, the answer is “It depends.”
Growth strategies that include a mission to become the top-performing company increasingly include supply chain objectives like streamlining operations, reducing costs, launching a new product or service, or investing in new equipment. With so many options on the table, where should managers turn when considering where to invest?
Having an effective method to demonstrate which projects will have the most value is key to a successful growth strategy. One of the top tools for assessing this value is the ROI report – but in some situations, the CBA may provide better information.
When is it time to consider the cost-benefit analysis over the ROI report? Consider the following factors:
- Cost-benefit analyses offer simplicity. Often, a cost-benefit analysis is easier to understand than an ROI report. While financial professionals may not need the simplicity, it can be crucial for presenting information to managers or executives who are not sophisticated in finance. A cost-benefit analysis provides clarity that ensures everyone is on the same page when it comes to the financial impact of the project.
- Cost-benefit analyses are standardized. A cost-benefit analysis uses the common unit of money to provide a standardized financial view. Both the costs and benefits of the project are expressed in dollar amounts, making it easier to reach a conclusion as to whether a particular project provides the value the investors are looking for.
- Cost-benefit analyses promote fiscal accountability. In many cases, using an ROI report does not allow department managers to be held accountable for projects. An ROI report doesn’t show the necessary data and numbers in a sufficiently systemic fashion to measure the actual performance. By contrast, a cost-benefit analysis describes in a simple, quantifiable, and understandable manner the benefits of the project – giving managers a clear benchmark and also providing the information necessary to hold them accountable for those results.
- Cost-benefit analyses are often more accurate. Many managers prefer the ROI analysis because they claim its percentage-based approach is clearer and more accurate than the dollar amounts listed in the cost-benefit analysis. However, an ROI analysis can easily create variation. Straightforward dollar amounts provide the accuracy needed to measure and assess both potential risk and actual value.
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